India's ETF investors making up for missing gold buyers

By Swansy Afonso
The Wall Street Journal
Friday, September 18, 2009

http://online.wsj.com/article/SB125326794569222705.html

MUMBAI -- Record prices have forced many of India's traditional gold buyers out of the market in recent months with jewelry demand remaining largely lethargic, but the recent rally in prices is creating a new source of demand: investors who are looking for the safety, convenience, and steady returns of exchange-traded funds, or ETFs, backed by gold.

Even among investment products, ETFs are gaining an upper hand over gold bars and coins because of the easy liquidity and lower costs associated with ETFs, analysts say. India has for long been the biggest market for gold, but much of that demand has traditionally been from rural households which buy gold in the form of jewelry.

While India continues to be a price-sensitive market with every rally hitting demand for the yellow metal, the rising popularity of ETFs indicate that going forward, the Indian market could see less of an impact from rising prices at a time when gold is again in the limelight because of a falling dollar and increasing fears about the return of high inflation.

"In the last 10 days, our daily volumes have more than doubled to 70-80 kilograms. This is despite it being an inauspicious period to buy gold in the country," said Sanjiv Shah, executive director of Benchmark Mutual Fund, which has the largest volumes and assets under gold ETFs in India.

Domestic spot gold prices rose above 16,000 rupees ($332.6) for 10 grams for the first time Wednesday after international prices convincingly moved above the key $1,000-per-troy-once level earlier this week.

The rally has come at time when Indian consumer demand has already been at multi-year lows since the start of the year. According to the World Gold Council, India's gold consumption fell 38% on year in the April-June quarter to just 109 tons. During the previous quarter, gold sales were only 17.7 tons, down 83% on year.

Those numbers, however, are not deterring fund houses from launching even more instruments for investors looking at gold as an option.

According to market participants, a number of Indian fund houses are planning to launch gold ETFs in the next few months.

Religare Mutual Fund and HDFC Mutual Fund have submitted proposals to the Securities and Exchange Board of India -- the industry regulator -- to launch new ETFs.

Six fund houses -- Benchmark Asset Management Co., Kotak Mahindra Mutual Fund, UTI Asset Management Co., Reliance Capital Asset Management Ltd., Quantum Mutual Fund, and SBI Mutual Fund -- already offer gold ETFs in India.

Separately, UTI Mutual Fund, Reliance Mutual Fund, and IDFC Mutual Fund have submitted proposals to launch funds that invest in gold ETFs.

"In the last year Indian gold ETFs have given excellent returns, prompting major fund players to plan more launches to tap this market," said Kapil Gandhi, a trader with STCI Commodities.

According to data from exchanges and the Association of Mutual Funds in India, gold ETFs have given returns of about 35% in the year ended Sept. 15, while gains from gold futures were around 25% for the same period. The stock market, as measured by the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, returned an even lower 23%, making gold ETFs one of the best investment choices last year.

With some analysts expecting domestic gold prices to hit 18,000 rupees/10 grams soon, more investors are expected to go in for asset re-allocation and increase their investment in gold ETFs.

"Investors who had been waiting on the sidelines are now coming in and volumes have been above average in the last few days," said Arvind Chary, fund manager for Quantum Mutual Fund's gold ETF.

"Out of the total consumption of 800 tons of gold (annually), anecdotal evidence suggests that 200 tons were in coins and bars. Over a period of time, this demand will shift to gold ETFs," said Shah of Benchmark Mutual Fund.

This is expected to result in more gold buying by these fund houses. Currently, gold holdings by the six listed ETFs in India are estimated around 6 tons.

But some industry officials warn fund houses may be getting overly excited about the scope of the market.

"Indians still prefer to hold gold in their hands," and that is "proving to be a deterrent to the growth of ETFs in India," said Ashok Minawala, former chairman of the All India Gems and Jewellery Trade Federation. "People have started accepting" the current high prices as expectations are for prices to rise further. That is helping revive consumer demand, he said.

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