Gold ETFs Dazzle Investors on Dhanteras

Over 2,550 kg gold ETFs were traded on the day, 8.5 times more than last year

Gold exchange-traded funds (ETFs) witnessed record trading on Dhanteras, a day considered auspicious for buying the yellow metal. More than 2,550 kg worth of gold ETFs were traded on the exchanges this Dhanteras, taking the total value of trade to more than . 650 crore in a single day, nearly 8.5 times higher than last year. 
The heavy buying was prompted by perception of gold as a hedge against inflation than mere festive buying, said experts. Buying was also boosted by the massive returns that investors earned from their gold investments last dhanteras. 
Investors, who spent on gold on dhanteras last, year have seen their investment appreciate by more than 38%, much higher than returns from other asset classes such as equity or debt. However, experts said that a correction in gold prices can't be completely ruled out in the short-to-medium term, particularly if inflation starts easing. "It is difficult to predict the movement of gold over a shortterm period and the ongoing price spurt is clearly an outcome of global uncertainties, inflation and rupee depreciation," said Chaitanya Pande, head of fixed income with ICICI Prudential Mutual Fund. However, once inflation starts easing, gold can be expected to underperform, he said. 
"But as gold is not correlated to other assets, it carries significant importance as a diversification hedge," he added. 
Attributing the decline in rupee as one of the main reasons for the surge in gold prices, he said, "While dollar gold has appreciated by about 13% since July this year, appreciation in rupee gold has been about 23%." Concurring with this view, Lalit Nambiar, fund manager and head of research at UTI Mutual Fund, said, "Gold is appreciating as investors are losing trust in currency. With currencies getting debased globally, gold is gaining firm ground as an investment avenue as it retains value in real terms. Given the current scenario, we don't anticipate a bear case for gold." 
bakul.chugan@timesgroup.com 

Gold Rush a Speedbreaker in India’s Growth Story

Savings of Indian households locked in yellow metal don't reach economy

    The glitter of gold is taking the shine off India's growth story. According to World Gold Council, India's gold imports rose 60% in April-June 2011 from a year ago, as people snapped up the timetested hedge against inflation. 

India has always been a huge gold consumer, but the yellow metal is now our second-biggest import, behind crude, up from fifth place in 2007-08. But, this fascination with gold could be a reason why growth seems to be flagging. Money locked up in the yellow metal effectively disappears from the economy to become jewellery or sits idle in bank lockers. "Money spent on gold is mostly wasted because it's only hoarded and simultaneously excluded from the financial inter-mediation system," said Abheek Barua, chief economist, HDFC Bank. As money has flowed into gold, India's household savings have moved away from productive financial assets, falling to 9.7% of GDP during 2010-11 compared with 12.1% in the previous year.  This shift away from financial savings can dent growth, but it's hard to say by exactly how much. "To the extent there is a shift from household savings in financial assets towards gold, which we know has been happening, it would lead to some loss in the GDP growth," said Indranil Pan, chief economist, Kotak Bank, "although it's hard to gauge the magnitude of the loss." Gold imports are up nearly half a percentage point of the GDP in the last three years, implying that much more of savings is getting locked up in an unproductive asset. That much of the gold is imported also worsens the current account deficit. The hunger for gold seems to have been triggered by increased risk aversion after the global financial crisis.  Surprisingly, the soaring prices of gold, now at three-decade highs, haven't driven buyers away.  Of course, national accounts do not consider gold as physical saving – gold imports are considered as consumption – but, as far as buyers are concerned, gold buying has a high savings consideration. "Gold is the preferred form of savings for people and there's nothing one can do about it. It is, therefore, important to make financial savings more attractive," said C Rangarajan, chairman, Prime Minister's Economic Advisory Council. The fact that India doesn't produce much gold but imports most of the stuff increases leakages from the economy. "If instead, the same money was spent on other assets like homes, the money would have circulated in the economy," said Sunil Sinha, senior economist with Crisil, a ratings agency.  Pronab Sen, member, Planning Commission, agrees with the argument that high gold imports are not good for the economy, but he doesn't feel it is material in the current economic environment. "Since investments aren't really taking off at the moment, to talk about this in terms of inadequate savings isn't necessarily true," Sen said. "This shift to gold could become a problem over time as household savings in productive assets fall, but not right away."