High gold prices not to trim volume growth of ETFs

Volume growth in gold exchange traded funds (ETFs) will not be adversely impacted due to rising gold prices in the domestic and international market. It rather is expected to see an upward trend on the back of uncertainties in the global financial system.

Gold ETFs usually take cue from the rise or fall in the gold prices tandem with price variation of the commodity.

“We don’t see any fall in demand for gold ETFs due to rise in unit prices. Rather, present uncertainties in the global financial market will see more investors taking a safe haven option in gold,” Chirag Mehta, fund manager (commodities) of Quantum Mutual Fund said.

Though Indian consumers are price-sensitive, eroding return on equities will drive them to invest in gold ETFs, he added.

Gold price is hovering above $1,200 an ounce in recent time due to the ongoing debt crisis in the European economies. Further, weakening euro against the dollar and eroding value in the global equities market is also pushing up prices.

According to the World Gold Council estimates, investors bought 5.6 tonnes of gold ETFs in the first quarter of this year worldwide. As a result, the total amount of gold the council monitors in ETFs hit a new record of 1,768 tonnes worth approximately $63.4 billion.

Even Indian investors had showed a sound appetite for the commodity in the special trading session in BSE and NSE during ‘Akshaya Tritiya.’

NSE, alone, had witnessed a turnover of Rs 172.39 crore in comparison to turnover of Rs 20 crore in a normal trading day.

Moreover, Association of Mutual Funds in India (Amfi) data shows that the total assets under management of gold ETFs crossed Rs 1,700 crore in April compared to Rs 700 crore in April 2009. In April, alone, gold ETFs saw flows of approximately Rs 50 crore.

“Though banks like SBI have floated plans like interest payment on gold deposits with loan against physical gold given by various financial institutions, Gold ETFs will attract investors for its affordability, yield on investment and less risk proposition, Mehta added.

According to market estimates, since its launch in 2007, gold ETFs have emerged as a strong asset class, generating more than 27 per cent return on CAGR(compound annualised growth rate) in the past three years in comparison to just more than 4 per cent returns from the equities market.

“In last few months, investment interests have witnessed an increase to counter the fall in equities market and it is expected to sustain in medium-term,” Tanay Vanushali, an analyst of India Infoline said.

He also said that the rise in gold prices, which was reflected in both spot and future prices of gold ETFs, would not dampen investors’ appetite.

However, some industry experts have a different view on this matter.

“Gold ETF prices are on a slightly higher level now due to rising gold prices, which is restricting new entrants from the market. So, from an investors perspective, it’s better to wait for a correction in the price levels,” Lakhmi Iyer, head(products), Kotak AMC said.

Net volume in gold ETFs turned nega tive in May as Indian investors are pretty price sensitive, she added.

She, however, said that investors with a long-term view of the market should stay invested in the commodity.