Indian gold ETF eyes banks, mutual funds

Benchmark Asset Management Company Private Limited launched India’s first gold Exchange Traded Funds, or ETFs, on Feb. 15. Traders said they expect the fund to raise about 650 million rupees ($14.7 million) when it closes on Friday.

ETFs allow investors to gain exposure to commodity markets without setting up futures trading accounts or taking physical delivery. Sponsors of such funds buy a matching amount of the commodity from the market to keep in bank vaults.

‘Gold is no longer a seasonal commodity,’ Gnanasekhar Thiagarajan, director of Commtrendz Research, said. ‘There are so many funds and that is what ETFs could be targeting, wherever there is asset diversification needed.’

Gold prices are expected to reach about $700 a troy ounce by June from about $655 now, he said.

Analysts said some retail customers may purchase ETFs as an investment which could always be converted into physical gold later. But it would take time for the instrument to gain popularity among them, they said.

Jewellery accounts for 80 percent of India’s annual gold demand of some 800 tonnes. The country’s one billion people buy nearly a quarter of the global sales.

There are some 10 global bullion ETFs including in the United States GLD.N, the UK GBSx.L, Australia GOLD.AX, Turkey, Singapore SGLD.SI and South Africa.

Such funds, trading on the world’s major stock exchanges and backed by physical metal, have accumulated about 600 tonnes of gold -- nearly a quarter of annual mine output -- in the three years since the first launch.

Gold held in ETFs worldwide rose 66 percent to 604 tonnes in 2006 -- the equivalent of China’s official gold reserves.

More ETFS

Seven to eight ETFs are expected to be operational in India over the next one year, with most to be listed on the National Stock Exchange, the country’s largest bourse.

UTI Gold Exchange Traded Fund will open March 1-12. Tata Asset Management Ltd., Prudential ICICI Asset Management and Kotak Mahindra Asset Management Co. Ltd. have filed offer documents.

‘I am expecting Gold ETFs to be successful. Indians are lacking a proper investment tool in gold markets,’ Anindya Banerjee, analyst in IL&FS Investmart Commodities Ltd.

Benchmark said on Tuesday it had appointed six leading bullion traders including Ausom International, Hundia Exports and M.D Overseas as authorised participants for its ETF.

They have guaranteed to provide liquidity for investors by acting as market makers, providing buy and sell quotes to customers.

‘It is a good product, but it may take time for popularisation,’ said Nayan Pansare, director at Say India group. ‘Ultimately, the main demand is from rural markets here.’

He said one nagging concern was whether government would impose taxes on ETFs dampening sentiment.