Persistent fears over the euro zone and a gloomy global economic outlook attracts safe haven buying in India; gold ETFs and e-gold surge higher.
Author: Shivom Seth
Posted: Thursday , 14 Jun 2012
MUMBAI – Gold prices in India have reached an all time high of $544.74 (Rs 30,420) per 10 grams. In Delhi, gold jumped by $4.83 (Rs 270) to surpass its previous record of $544.56 (Rs 30,400) set on June 6. Despite the high price, investors in India are continuing to bet on gold, with gold exchange traded funds (ETFs) and e-gold turning out to be the best investment over the long term.
At the Multi Commodity exchange in Mumbai, in the futures market, the February 2013 contract has a buy price of $557.36 (Rs 31,132) for 10 grams. The December 2012 contract has a buy price of $551.77 (Rs 30,796) for 10 grams, while gold for October delivery rose by 0.16%, indicating a firm price for the yellow metal in the coming months.
Among asset classes, investors in India still consider gold the most robust as it counters the effects of inflation and exchange rate fluctuations. In Mumbai, standard gold prices have risen by 26.94% over the last one year. Other precious metals have also given assured returns.
In Chennai, on Thursday, bar silver traded at $1000.86 (Rs 55,855) for 1 kilo. Standard gold traded at $541.86 (Rs 30,240) for 10 gram, while the retail ornament gold traded at $50.65 (Rs 2,827) per gram.
Gold prices in India have been perched at lofty levels due to the continuous weakness in the rupee, which has been trading close to its historical low against the dollar recently. The rupee, which weakened on Thursday to trade at 55.81 to the dollar, plays an important role in determining the landed cost of the dollar quoted yellow metal.
At the start of June, the rupee touched a record low of 56.51. Though the rupee’s historic low against the US dollar has sent domestic gold prices higher, Indian investors appear to have shifted to e-gold or gold ETFs to ride out the bump.
Gold ETFs
“For some time now, we are noticing investors shying away from equities due to their lacklustre performance. The high gold price is also ensuring that most people tend to go slow on gold investment. This is not true for gold ETFs though, which have seen a marked rise in activity,” said Paritosh Gupta, bullion dealer.
Over the past five years, and when compared to equity, gold has delivered 27.19% annualised return. Equities on the other hand, has delivered an annualised return of just 2.67% over the same period, said Gupta.
Investors continue to buy the metal as a safe haven and to diversify away from equities. Assets under management of gold funds in India were $1.83 billion (Rs 102.18 billion) in April 2012. The assets held under India’s gold ETFs nearly doubled year on year. The assets were valued at $981 million (Rs 54.63 billion) a year ago.
In 2011, gold ETFs in India saw a net inflow of $725 million (Rs 40.46 billion), the highest ever. Amid turmoil in equities, investors in India saw gold as a safer choice and the asset performed well, returning 31.7% in 2011. A similar situation could play out this year, say traders.
Last year also saw the launch of several gold funds indicating a spurt in investor activity. “With high inflation leading to negative real returns in fixed income investments, investors have been keen to maximize returns. This is where gold has played an important part,” said Mayur Shah, bullion analyst with an investment brokerage house.
“Even if the equity market does well going forward, we advise investors to ensure that gold should be at least 5% to 10% of their portfolio, as it is a stable product and the growth opportunities are huge,” said Himanshu Vyapak, of Reliance Capital Asset Management.
The fund house, which launched the first systematic investment plan for gold in the country almost a year ago, added 500,000 investors in the first nine months of the launch of the product.
E-GOLD
Singapore Mercantile Exchange (SMX), which is backed by Financial Technologies (India), launched gold and silver contracts based on Indian prices. SMX, the first trans-Asian multi-product commodity and currency derivatives exchange, announced the successful completion of its first daily settlement of the E-Gold futures based on the Indian gold price.
The contract which went live on June 1, witnessed a jump of nearly 3 times in its volumes with $16 million traded since its launch.
Participants in the SMX E-Gold and SMX E-Silver are able to use and benefit from pricing in the most liquid gold and silver futures contracts in Asia. The participants are able to hedge their exposure based on one of the most liquid precious metals futures and physical market and link hedging to other similar contracts in the world, an official said.
India is the largest physical market for gold accounting for around 27% of global consumer demand in 2011 totalling 933.4 tonnes valued at $46.37 billion. There is a strong price correlation between Indian gold futures and international gold futures. The Indian market represents the fundamentals of Asia well, the official added.
In India, on Thursday, commodity bourse the National Spot Exchange said E-Gold units can now be converted into one gram of gold coin under a new facility. No other commodity investment product in gold available in India has this facility.
This is in addition to the existing delivery denomination options available in 8 grams, 10 grams, 100 grams and 1 kilo lots.
The e-gold series has given 76.46% return since launch. The e-silver series has given a 99.12% return since launch. With no recurring expenses, gold ETFs and e-gold are turning out to be major investment options for Indian investors.
