>GOLD ETF - A REVIEW (HDFC SECURITIES)

Recent Developments and Performance of Gold ETFs on the Indian bourses
The Reserve Bank of India bought 200 tonnes of gold from the International Monetary Fund in November 2009. It is thought of as the ultimate currency as it came to the country’s rescue in 1991 when India faced its worst balance of payments crisis and had to pledge 67 tonnes of gold to shore up its dwindling foreign reserves.

Gold has been one of the best performing asset classes in 2009. The COMEX gold index was up 25% in 2009. Gold prices in India have been up 23%. It is currently trading close to USD 1,130 per ounce after touching a high of $ 1,226 in early December 2009, compared to the low of $681 in Oct 2008.

The demand really is getting translated into ETFs slowly. But investors are gradually moving into gold ETFs for investment instead of physical form. It has been seen that a lot of SIP type transactions take place as lots of investors buy one-one gold every month and the number of investors have gone up to 60,000-65,000, nearly tripling in the last 4-5 months. The number of new accounts created by Gold ETFs in India surged 57% between March and September 2009.

The prices of the 6 Gold ETFs have moved more or less in tandem with the price of Gold locally (except Quantum GETF that quotes at a discount) . This can be observed from the chart below. The first chart shows the correlation between Gold prices and ETFs namely Benchmark Gold Bees, Kotak Gold ETF, UTI Gold ETF. The second chart shows the correlation between Gold prices and Reliance Gold ETF, SBI Gold ETF and Quantum Gold ETF. The price of Gold and Gold ETFs on the chart below are rebased to 100.

The overall AUM of the Gold ETFs on the Indian bourses has continued growing till December 2009 as per the data of AMFI India. The total AUM of Gold ETFs stood at Rs 781 crs in February 2009. This increased to Rs 1352 crs in December 2009. The growth has been consistent throughout the last few months for Gold ETFs.

Risks to Gold ETFs

■ Trend reversal in Gold Prices

■ Lack of liquidity in Gold ETFs remains a major concern for investors. In India large institutional investors and hedge funds are not major participants as in the west where they do so to cover their dollar exposure.

■ Rupee appreciation could depress returns

■ Jewellery gold demand could fall as gold remains at high prices.

■ Gold gives a lower rate of return in an upward trending equity market. Over the last 20 years, the average return from Gold has been around 7%. So, if the past trend continues, one could expect around say 6-9% returns from gold in the long-term.

■ The rapid growth of gold exchange-traded funds is a two-edged sword for gold, increasing volatility both up and down. By facilitating gold investment and ownership by individuals and institutions they have, without a doubt, brought significant numbers of new participants to the market and boosted buying by veteran gold investors as well. This has already contributed to the increased shortterm day-to-day gold-price volatility over the past year and it is likely to contribute to the long-term cyclical volatility as well.

To read the full report: GOLD ETF