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A new gold era awaits Indian investors
Allan Seccombe
Posted: Fri, 27 Jan 2006

[miningmx.com] -- INDIA will launch at least two gold-backed exchange traded funds (ETFs) in coming months, joining the meteoric rise in interest in the investment tool seen in five other countries over the past year.

Paul Walker, chief executive of London-based precious metal consultancy GFMS, said the amount of gold locked into ETFs has risen by 200 tonnes to 420 tonnes in the year to end-December 2005 in the United States, UK, France, Australia and South Africa.

On 24 January, the Securities and Exchange Board of India (SEBI) amended its mutual fund regulations to allow such funds to offer gold-backed ETFs. Each ETF counter or share represents one hundredth of an ounce of gold.

“At least two mutual funds have put in applications and they are waiting for regulatory approval,” said GFMS metal analyst Sanjiv Arole, who is based in Mumbai.

“They are on track and we should have these two in the next couple of months at least. It should be fairly soon,” he told Miningmx. “There’ll be quite a few others in the pipeline.”

It is difficult to tell what exactly the impact the ETFs would be on gold demand from India, he said, adding some traders were concerned there could be an impact on physical gold demand.
We view this as positive for investment demand for gold in India
A note from JP Morgan said the launch of ETFs in India is bullish news for gold.

“We view this as positive for investment demand for gold in India, though this may cannibalise fabrication demand to some extent,” JP Morgan said.

“However, we believe that this new and convenient investment avenue should lead to higher total demand from India.”

Up to 85% of gold in India goes into jewellery, which is used in weddings and festive purchases, or as an investment.

“The gold ETFs should attract investments currently happening in jewellery as they offer 24K (99.99%) purity, ease of transacting, and no storage and safety issues that come with physically holding gold,” JP Morgan said.

The size of the Indian ETF launch is not known at this stage.

“It could be a popular investment opportunity in the bigger cities,” Arole said. “Gold has been in the news with the price going up. The stock market has been very volatile and there’s a feeling it’s overheated. So, people would probably like to look at gold as an investment to park their excess funds.”

The ETFs would prove an ideal platform for those stockbrokers who have in the past expressed an interest in investing in gold, which has soared to levels not seen in more than two decades, he said.

The gold price could gain another $50 to $100 within the next 12 to 18 months, Walker said.

“Our house view is that there is still upside to gold… This is an expectation-driven market where people are making a judgement call and that’s why the ETFs have grown. It’s on the back of that,” Walker said.

“Over an 18 to 20 month time frame we believe there is a 50/50 chance that you could see the price move up to the $850 level,” he said.

“That is premised in our view of the U.S. economy and its imbalances, where the dollar is going to go and the fact there are no other obvious asset classes that are crying out for investors to put their cash in at the moment,”

Gold has become a much sought after investment and speculative play against a backdrop of concerns about the United States economy, the health of the dollar, high oil prices and worries about the political situation in places like Iran.

The volatility of the gold price when it ranged between $540 to $560 in a week was causing demand to drop off India, the world’s single largest consumer of physical gold, accounting for about a third of global production.
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“More than anything, it is stability which is required. The high price may be accepted,” Arole said.

Gold demand in the Indian sub-continent was 481 tonnes in the first half of 2005, falling to 228 tonnes in the second half, according to GFMS data.

India is in its gold-hungry marriage season, which runs from January to March, when there is a lull, before picking up again in April, May and into early June. Some people were exchanging their old gold jewellery to make new pieces, Arole said.