The Virtual Gold Rush

Gold Exchange-Traded Funds hold 16 tonnes in India, which has 18,000 tonnes of real gold

In 2010, Gold Exchange-Traded Funds (GETFs) went up by 80 per cent in asset value, according to Rajan Mehta of Benchmark Asset Management Company, a leader in India of this asset class. Not only did the price of gold rise robustly, so did the number of people opting for this investment vehicle.

The rising popularity of GETFs owes much to the Great Recession that saw stock markets tumble in 2008. The Sensex, for example, lost 47 per cent of its value between April and November 2008, eroding much investor wealth. The turbulence led shaken investors to look for safer investment alternatives such as gold, which began rising in value thanks to extra demand.

A GETF unit is not exactly gold. It is like a mutual fund unit that can be traded, and derives its value from a corpus of gold as its underlying asset. So, as the price of gold rises, a GETF unit’s value goes up proportionately. This way, it functions as a ‘store of value’ in inflationary times while also offering a chance to gain from a gold boom worldwide.

The Indian market for ETFs is still relatively young. There are currently 10 companies offering them in India, with about 250,000 investors on the rolls, holding a combined corpus of 16 tonnes of gold. This is a tiny figure, given that India has about 11 per cent of the world’s gold, about 18,000 tonnes—558 tonnes with the Reserve Bank—held physically.

But Mehta believes that ETFs offer several advantages over physical gold: “Besides offering an opportunity to buy gold in small quantities (even one or half a gram can be called one unit), it provides hassle-free storage and security to your gold.” The units are pegged to 24 carat gold, and investors need not fear either impurity or prices varying from city to city (a problem with real gold). That is why some 2,000 tonnes of gold, he adds, are held worldwide in such funds.

India too can be a big market for GETFs. “As awareness of GETFs spreads and a comfort level is reached,” says Chirag Mehta of Quantum Mutual Fund, “it would mark an inflection point for the industry.” How soon that point arrives is anyone’s guess. “But we are on the right track in educating investors,” Chirag Mehta says.

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Shailendra Tyagi