Paper Gold’s the New Safe Haven for Indians

Investment in ETFs doubles; cos account for nearly 50% of all purchases

India's purchase of paper gold doubled last year as corporates and SMEs, seeking a safe haven for their investments, flocked in large numbers to gold exchange traded funds (ETFs), a traditional favourite of wealthy individuals and households. Companies now account for nearly 50% of all ETF purchases in the country and SMEs, too, have climbed on to the bullion bandwagon. 

"The gold collections of ETFs have risen to 30 tonnes in 2011, from 15 tonnes in 2010. The number of corporate portfolios under ETFs has increased to 5,599 in 2011 against 3,310 in 2010. For the first time, SMEs have invested in large numbers," said Amit Mitra, MD for the Middle East and India region at industry body World Gold Council. 
The average price of gold per gram stood at . 2,362 in 2011 compared to . 1,800 in 2010, an increase of 31%. In comparison, the BSE Sensex fell by nearly 25% in 2011. "The stock market was weak in the second half of 2011, resulting in a lot of firms putting their faith in ETFs," says Brijesh Mehra, head of corporate and investment banking, RBS. But even in January 2012, when the Sensex rose 11%, investments in gold ETFs have gone up by 50% over the corresponding month of the previous year. 
The whole point of purchasing gold is that the buyer gets a form of financialinsurance, says the promoter of a . 145-crore Mumbai-based chemicals specialty maker, who didn't wish to be identified. "We have invested close to . 50 lakh in gold ETFs considering it as a safe and steady instrument. They are easy to keep as compared to purchasing physical gold from the market which may involve risk," he said. 
ETFs are instruments that trade like shares and are backed by physical holdings of the commodity. The financial product enables buyers to own gold without taking physical possession of it. India, whose appetite for gold, dates back centuries, introduced ETFs in 2007, and there are currently eight such funds in the market. While rising gold prices have resulted in the demand for jewellery declining, gold funds continue to witness explosive growth. "The first month of this year itself has shown a rise of nearly 50% in gold ETF investment than the previous year. It shows that lot of high net worth individuals, individual investors and small and medium firms want to park their money in a secured form of asset," said Lakshmi Iyer, head, Fixed Income & Products division, Kotak Mahindra Bank, that runs a gold ETF. The growth is, however, happening on a small base. India's gold ETF collections are just 30 tonnes against a national gold consumption of 933 tonnes and an investment demand, consisting of bars and coins and ETFs, of 366 tonnes. The attractiveness of gold ETFs in India bucks the global trend of falling inflows in paper gold as investors in the US and Europe struggle to cope with a slowing economy. 
According to the World Gold Council, inflows into gold ETFs have shrunk to almost half from $14.47 billion in 2010 to $7.78 billion in 2011. 
Bright Spot 

• Gold collections of ETFs 
have risen to 30 tonnes in 2011 from 15 tonnes in '10 

• An average price of gold 
per gram stood at . 2,362 in 2011 against . 1,800 in 2010, an increase of 31% 

• While rising gold prices 
have impacted jewellery demand, gold funds see an explosive growth