Is the interest in Gold ETFs waning?
Moneylife Digital Team 17 May 2013

Traded value of gold ETFs on the National Stock Exchange hardly rose on Akshaya Tritiya. Besides, last month Rs36 crore went out of gold ETFs

On the occasion of Akshaya Tritiya, an auspicious day for buying gold, the National Stock Exchange (NSE) recorded a traded value of Rs691 crore in gold exchange traded funds (ETFs). This was just about 14% higher compared to the traded values on the auspicious day, last year, which stood at Rs608 crore. Despite the fall in prices, and intense propaganda by NSE and its members, the growth in traded volumes has been much less compared to the previous years. Over the year from 2011 to 2012, gold volumes increased by as much as 44% from Rs423 crore in 2011. The annualised growth rate from 2010 to 2012 has been a whopping 85% on this auspicious day. Gold ETFs, for the month of April 2013, faced a net outflow of Rs36 crore. Are Indian investors moving away from gold ETFs?


Gold ETFs have been very popular among fund companies. Most of the fund houses have launched gold ETFs and have been vigorously pushing this as an essential part of retail investors’ investment portfolio. Many investors may have been buying ETFs without fully realising the downside of them—low liquidity that can play havoc with the price at which you buy and sell when the market is volatile. Gold ETFs emerged as the favoured investment avenue for the retail population, seduced by the relentless rise in gold prices. Many investors accepted the continuing rally in gold as a foregone conclusion and put their savings in this asset, cheered on by AMCs and their distributors.  
(Read our cover story on gold where we look into the different myths about gold: Gold turns cold)

Have investors realised the perils of investing in ETFs after the recent crash? Gold, which has been delivering tremendous year-on-year returns, has delivered a negative return over the past year. Indian investors often seek guaranteed and safe returns, seeing the price of gold rise continuously over the previous years; they would have been led to believe that the price of gold would never crash. However, that belief seems to be questioned now.

The popularity of these stock-like investments, have probably helped driving up the commodity’s price to record highs over the past few years. Gold futures have fallen by nearly 15% over the year and much of it is said to be caused by the huge outflows from gold ETFs. Billionaire investor, George Soros, defined the theory of reflexivity saying that rising prices attract buyers whose actions drive prices higher still until the process becomes unsustainable. Has the process become unsustainable now? Soros, the chairman of Soros Fund Management, has been increasingly bearish on gold. He recently sold nearly 1.3 million shares of SPDR Gold Trust, worth more than $227 million just before the gold crash.

The SPDR Gold Trust in the US has grown to become one of the largest gold exchange-traded funds, with assets under management (AUM) of roughly $50 billion. In April 2013, nearly $7 billion in funds left the SPDR Gold Trust. SPDR Gold Trust (GLD) has seen outflows of 11% this month amounting to 1,083MT. Gold has tumbled below $1,500 an ounce probably due to a stampede out of SPDR Gold.

Prices for ETFs are determined continuously in exchange trading. Orders are executed immediately. ETFs can be traded at any time while the stock market is functioning. It is like investing in shares where you can theoretically buy and sell on a daily basis. That leads us to the flip side of ETFs. And at Moneylife we have constantly been highlighting this in its articles and workshops. (Read: Market volatility exposes perils of Exchange Traded Funds).

1 decade ago
I expect Gold to touch US$ 1,200. an ounce. This has been on the cards for some time despite the WGC's efforts. However, the impact in Indian Rupees will be different. Given India's astronomical inflation rate fanned by the Govt's gargantuan profligacy and corruption, Gold may still serve as a currency of last resort despite Govt's efforts to transcend all hedges against its destructive abilities. Personally, I still would not invest in Gold till it goes below 22K boondhies for 10 gms.
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