London, 20 October 2011

Sharps Pixley: As Indians are looking for safer investments and means to protect their portfolio against inflation, the world’s largest gold consumers are increasingly becoming investors. Consumer demand in India jumped 29% in the twelve months to Q2 2011 to 1,099 tonnes, of which bar and coin investments were 403 tonnes which rose 50% year-over-year, compared to jewellry demand which rose 19%, according to World Gold Council (WGC).

One sector of investment which could “explode” according to Reuters’ report is gold ETFs as investors are getting used to “click-and-park” mode of investing. Gold ETF volume is still small at over 15 tonnes compared to India’s annual gold demand of 900 tonnes. However, according to the data from Association of Mutual Funds in India, gold ETFs AUM jumped 2.7 times over a year ago to $1.71 billion in September 2011 while Indian gold price rose 35% and the Indian stock market tanked about 17% during the same period. Sooner or later, investment demand could catch up with jewellry demand.

Many reasons contributed to Indians’ demand for gold ETFs. Ajay Mitra, managing director at WGC mentioned that people like the convenience of trading ETFs with the same brokers for their equities as well as no intermediate costs for gold ETFs unlike in jewellry. ETFs also do not have wealth tax. Gold on average outperformed equities by 15% every year in the past 3 years.

Gold ETFs, selling for a minimum monthly payment of 100 Rupees (about $2) are also affordable for low-income people. A recent benchmark for domestic gold price established by Crisil Research would provide consistency in evaluating various gold products’ performances and help fund houses to add gold to their portfolio.

Sanjiv Shah from Goldman Sachs Asset Management is seeing financial advisers and planners advocating gold as part of investors’ portfolio especially through ETFs. He believes that gold should be 10 to 20% of an investor portfolio. WGC’s Mitra is also optimistic for gold outlook in India because of latent demand during the festival quarter from October to December and expects a better Diwali.

Consumers might wait a little because of volatility but he did not think price is a factor. In fact, Goldman’s Shah noticed that people have been buying gold ETFs in the so called bad period called Shradh, likely gaining momentum over that of physical and jewellry demand over the next 6 months to 1 year.

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Ross Norman, CEO, Sharps Pixley.
www.SharpsPixley.com