Volumes in gold ETF short on high prices

Onrush of short-term traders & speculators seen as a sign of the rally ending.

Short-term traders and speculators have pushed up activity in the gold exchange traded funds (ETF) segment on the National Stock Exchange. As trading activity touched unprecedented levels, experts see this as an ominous sign, pointing to an end of the gold rally.

“The crowd is getting in. People who have never invested in gold are buying gold. We are near the end of the gold bubble,” said Deepak Mohoni, managing director of trendwatchindia.com. “When bubbles burst, it’s always painful.”

In the first three weeks of this month, the total traded value of gold ETFs on the NSE had crossed Rs 2,352 crore, over twice the average monthly figure of Rs 933 crore during the first seven months this year. The daily average turnover witnessed a four-fold increase to Rs 168 crore from Rs 44 crore seen in the January-July period. While some of this spike is attributed to the increase in prices, a significant part is due to increased trading activity on the exchange. August saw the number of trades cross 500,000, a three-fold increase over the previous month.

Though a relatively new avenue for investment in gold, ETFs have gained popularity among investors in the past couple of years, fuelled largely by the inspiring bull run in the underlying product. Assets under management in these funds have risen to Rs 5,090 crore. Eleven ETFs hold 24.1 tonnes of gold between them.

Experts say even as investors flee from paper assets towards the safety of gold, the rally in the yellow metal is beginning to show signs of weakness. Gold has already run up considerably this year and is the best performing asset class, as investors and central banks boost their holdings on concern that global economic growth may stall, amid a worsening sovereign-debt crisis in the US and Europe.

A recent survey by Bloomberg predicted spot gold prices to reach $2,000 an ounce by the year-end, extending this year’s gain to 41 per cent. However, the Chicago Mercantile Exchange’s move to raise margins to discourage speculators would help cut the rally’s legs. After hitting an all-time high of $1,917 in international markets on Tuesday, it has corrected since by a little over eight per cent. Despite the fall, gold remains one of the best asset classes, having gained 24.7 per cent, year to date.
 

GOLDEN DAYS
ETF Name	Inception	AUM(Rs cr)	Expense Ratio (%)	Unit Size(gm)	AUM (tonnes)	NAV 28-Aug
	28-Aug

Benchmark Gold ETFFeb ’072028.001.001.009.522660.43 Reliance Gold ETFOct ’071135.001.001.005.472639.63 UTI-Gold ETFMar ’07567.001.001.002.662713.10 KOTAK Gold ETFJun ’07456.001.001.002.142712.19 HDFC MF Gold ETFJun ’10299.001.001.001.372766.49 Source: nseindia.com

Some analysts expect a sideways trend (trade within a range). “We expect gold to trend sideways for some time now. Though the long-term bull trend still holds, we need to be cautiously bullish now,” said an analyst from Aditya Birla Financial Services.