Paper gold slow to catch on in India

From Reuters
Saturday, August 25, 2007

http://in.reuters.com/article/businessNews/idINIndia-29146020070825

NEW DELHI -- Indian investments in gold exchange-traded funds are likely to rise steadily over the next few years, but it will take a long time before they pose a challenge to sales of gold jewellery, coins, and bars, experts say.

So far the funds have attracted investments equal to about three tonnes of gold since they were launched five months ago, a fraction of the 740 tonnes gold the country consumed last year.

Experts at a conference in Mumbai said the exchange-traded funds had not yet picked up in volumes partly because investment rules need to ease.

"Volumes will take time to come," said Bhargav Vaidya, a gold analyst. "More than 60 percent of India's gold buying comes from rural areas and the funds are hardly able to tap this segment."

He said the need to have an electronic trading account, which requires furnishing of income-tax proof, was a big deterrent to rural investors, as agricultural income is tax-free in India.

Industry officials said investments in gold jewellery, coins, and bars have traditionally attracted investments as there is no need for the disclosure of identity, but the advantages of transparency and the fact that there is no need to take physical delivery and store gold were bound to attract a specific body of investors.

"Over the next few years, fund managers would become comfortable with the exchange-traded funds," Paul Walker, the chief executive officer of GFMS, told Reuters. "Large investment funds would start to look at gold as a realistic alternative."

Rajan Mehta, executive director of Benchmark Asset Management, the first gold ETF to be launched in India, said a large number of investors had bought units of their funds after it was listed on the National Stock Exchange in March.

"More than 10,000 investors have joined in, after the listing of the fund," Mehta said, adding that this has swelled their total investor base to 24,000.

"We hope that it would at least double in a year's time."

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