You are here

Goldman Sachs paperizes India's largest gold ETF

Section: Daily Dispatches

Your gold ETF has changed

Provision to Invest in Gold Deposit Schemes Introduces Credit Risk to Such Funds

By Sachin P. Mampatta
Business Standard, New Delhi
Tuesday, June 17, 2014

MUMBAI -- Gold exchange traded funds (ETFs) have a new element of risk. These schemes, which earlier held physical gold equivalent to the unit holders' investments, now lend a portion of these as part of a government move to meet gold demand through domestic sources.

This means they no longer directly hold all the gold their investors have paid for. This introduces an element of credit risk to these funds, experts say.

Goldman Sachs Asset Management runs India's largest gold ETF. It issued a note to investors last month that the risk profile of the product had changed. "A situation could arise where the issuer is unable to return the principal physical gold to GS Gold BeES (their scheme) upon maturity or in case of an early redemption. Such inability to return physical gold could arise on account of liquidity problems or general financial health of the issuer," the note said.

... Dispatch continues below ...


Just for June: 1-Kilo Gold Bars At Only 1.6% Premium
and Six Months' Free Storage In Singapore Or Zurich

For June only GoldCore is offering 1-kilo gold bars at a premium over spot of only 1.6 percent. This is great value as premiums on kilo bars are usually 2 to 3 percent. For new purchases GoldCore is also offering six months of free, insured, segregated, and allocated storage in Zurich or Singapore.

For more information call Daniel or Sharon at +44 203 0869200 in the United Kingdom or at +1-302-635-1160 in the United States. Or email them at

This, in turn, poses a risk to unit holders in the mutual fund scheme. "GDS (gold deposit scheme), being an unlisted and non-transferrable security, can be redeemed only with the issuer and, hence, is subject to the risk of an issuer's inability to meet principal and interest payments on the obligation (credit risk)," it added.

Dhirendra Kumar, chief executive officer of fund tracker Value Research, said the nature of the gold ETF had changed. "So far the situation was that the underlying (product) was gold, and now the gold is lent to someone else. The lending norms are stringent but, still, the moment you lend, how the gold will circulate and the process of replenishing the stock as required add some complexity to the fund," he said.

Niranjan Risbood, director of fund research for Morningstar India, said the risk was minimal in a benign market but could be magnified in extreme situations. "I don't think it will have a significant impact in terms of risk, especially since the institutions they are lending to include entities such as the largest bank in India. It is only in extreme cases of liquidity crises, where investors are rushing to redeem in large numbers, that there would be a risk," he said.

Indian gold ETFs continue to be more conservative than their global counterparts, according to Risbood. International ETFs offer the option of investing in gold derivative contracts and take leveraged positions on gold, he noted. Indian gold ETFs can invest up to 20 percent of their assets in gold deposit schemes, according to the SEBI circular on the matter. However, they invest a lower proportion in such schemes, the data shows.

For example, consider the Goldman Sachs Gold ETF Fund, and the R*Shares Gold ETF. These manage a little more than 50 percent of these assets. They had invested 4.6 percent and 1.4 percent of their assets in gold deposit schemes, respectively, according to May-end figures available on the websites of the two asset managers.

There are currently 13 gold ETFs in existence [in India], with total assets under management of Rs 9,039 crore, according to June figures from Value Research.

* * *

Join GATA here:

Casey Research 2014 Summit
Hill Country Resort and Spa
San Antonio, Texas
Friday-Sunday, September 19-21, 2014

New Orleans Investment Conference
Hilton New Orleans Riverside Hotel
New Orleans, Louisiana
Wednesday-Saturday, October 22-25, 2014

* * *

Support GATA by purchasing DVDs of our London conference in August 2011 or our Dawson City conference in August 2006:

Or by purchasing a colorful GATA T-shirt:

Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009:

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

To contribute to GATA, please visit:


Buy precious metals free of value-added tax throughout Europe

Europe Silver Bullion is a fast-growing dealer sourcing its products from renowned mints, refiners, and distributors. Because of a legal loophole that will close soon, you can acquire the world's most popular bullion coins free of value-added tax throughout the European Union. You can collect your order in person at our headquarters in Tallinn, Estonia, or have it delivered in any of the 28 EU countries.

Europe Silver Bullion is owned and operated by North American and European experts in selling, storing, and transporting precious metals. We have an extensive product inventory of silver, gold, platinum, and palladium, and our network spans the world.

Visit us at