End Of The Gold Rush

Indians’ love affair with gold is eternal, be it to adorn themselves or as an investment tool. However, increasingly it is losing sheen in its physical form as the new generation investors are inclined towards its dematerialised format or paper form. Gold exchange traded funds (ETF) and sovereign gold bonds issued by the Reserve Bank of India on behalf of the government and digital gold are fast catching fancy of investors.

“The trend is set to get bigger in the next three-five years. However, ETFs have not done very well in India so far as they do not pay as big returns as the gold bonds,” says Somasundaram PR, MD (India), World Gold Council. Besides, there is a rise in adoption of the digital form of gold. Investors can buy them from apps like PhonePe and Paytm and can also keep it deposited. “These e-KYC compliant investments are completely redeemable. They are not a threat to the physical gold but will complement jewelry buying. Even millennials are catching up with the trend,” he adds. Around 800 kg of gold was transacted via this format in the last one year.

Every ETF is backed by physical gold, but the buyers hold it in dematerialised format, Somasundaram explains. On the other hand, though gold bonds mimic gold prices, it is not backed by physical gold. Total gold consumption in India last year was 760 tonnes. According to World Gold Council, this year’s demand will be between 700 and 800 tonnes.

 Admitting the increasing popularity of paper gold, Astha Jain, Senior Research Analyst, Hem Securities, says ETFs and paper gold have became more attractive due to financialisation of savings. “Gold used to be an attractive tool for investment 10 years back. But with financialisation of household savings, money has got diverted to tools like mutual funds and ETFs,” she says. Gold is perceived as the safest means of investment during a geo-political turmoil. “With globalisation and political tension decreasing significantly, the appeal to keep gold as an alternative asset class has reduced,” Jain further adds.      Technically investment cycle for any metal is 10 years and then for the next 20 years, their substitutes come in. “Between 2000 and 2010, gold and silver had touched their all-time highs. I don’t expect it to go higher in the next five years at least,” she asserts. Whereas demand for ETFs and bonds have increased as those are much more systematic. Jain says, “Today, gold is worn only during marriages. That too, the demands are not much high.”

Does it mean Indians’ fetish for jewelry is diminishing? Unlikely! When it comes to auspicious occasions, they still rely on yellow metal. However, as long-term investment tools, ETF and paper formats make more sense. Gaurav Mashruwala, financial planner and author of Yogic Wealth, says, “If you are thinking short-term - next one to two years - then buy physical gold. But for long-term investments, paper formats are preferable.”

The quantum of gold that India imports is massive, explains Dhirendra Kumar, Founder and CEO, Value Research. And, he believes that government’s gold schemes would only reduce the amount of import. “For thousands of years, gold has been certified as wealth, a currency that has survived all the vicissitudes of history and economics, and not without reason. It is a kind of social construct - it has value because everyone thinks it has value,” he says explaining, “It is hard for people to accept that gold is not a good investment anymore.”

However, if one is unable to overcome the lure of gold, “He can always invest in it, and then there are more modern, trouble-free forms of paper gold available,” Kumar further adds. There are several mutual fund companies that offer gold-backed mutual funds by closely tracking the value of gold.

“If you don’t mind locking your money for up to eight years, then the gold bonds are a great option. These are issued by the government from time to time and their value increases at par with the gold prices, plus there’s an extra interest of 2.5 per cent per year,” he notes. Moreover, unlike gold mutual funds, the gains from the gold bonds are tax-free. This makes them the exact equivalent of holding gold, along with a 2.5 per cent yearly bonus. He opines that gold makes sense only for those who have no access to or no trust in the financial system. “It is best viewed as an alternate currency,” he concludes.

In China, ETF has expanded greatly in the recent years with a potential for further growth, noted Zhiyan (David) Xu, Portfolio Manager and MD, Indexing and Quantitative Department, HuaAn Funds, in a report published in World Gold Council last year.

 HuaAn Funds began to explore gold-related products after the global markets crashed in 2008, he wrote, adding: “Gold ETFs finally gained approval in 2013, and were the first cross-regulator, cross-market and cross-system listed financial products in China.”

He also says, “Gold ETFs enjoy several benefits compared with other gold investments. The participation threshold is lower, holding costs are lower, trading is straightforward and investors do not need to focus on asset storage  or security.”

He further adds: “Gold ETFs came to the market in July 2013 and investor response was muted between then and the end of the following year. In 2015, however, gold ETFs began to gain momentum. Our spot gold ETFs increased by 250 million lots that year, along with those of fellow funds provider Bosera. Then, in 2016, the gold price rose sharply and all gold ETFs witnessed a dramatic scaling-up.”

Unlike the China story, the trend in India is completely different. In November 2016, India’s gold ETF holding was 20.1 tonnes, and in November 2017, it dropped to 18.4 tonnes, according to a World Gold Council data. But a minor reduction in gold ETF holding is not seen as a deterring factor. People are showing much interest in other paper gold options like sovereign gold bond and digital gold.

aparajita@outlookindia.com