In India, gold exchange-traded funds lose ground to sovereign gold bonds

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The investment demand for gold is surging. Gold ETFs globally saw inflows of 364 tonnes of gold in the January-March period, up from 26 tonnes in the same period last year, according to the data released by WGC last week. It is the highest inflow in a quarter in last seven years.

But demand for jewellery dropped. In the first quarter of the year, demand for gold jewellery totalled 481.9 tonnes, down 19 per cent over last year.

The increase in gold prices and the continuing weakness in consumer sentiments could be the reasons behind this drop in consumer demand. However, negative interest rates in Japan and Europe have stoked demand for the metal from investors.

“All measures by central bankers across the globe haven’t helped much in reviving growth and investors are losing faith in paper currency. That’s why we are seeing demand for gold go up,” says Gopal Agrawal, Chief Investment Officer, Mirae Asset Global Investments (India).

Data shows that some of the large gold-backed exchange traded funds saw investors queue up to buy new units. SPDR Gold Trust, the largest gold ETF in the world, saw holdings rise by 11 per cent in the March quarter to 819 tonnes (now at 851 tonnes). Holdings of Sprott Physical Gold Trust, Canada, were up about 40 per cent (to 54.8 tonnes). Holdings of Source Physical Gold, UK and Xetra-Gold, Germany, also increased sharply. China’s largest gold ETF, Huaan Yifu Gold ETF, too saw higher inflows. It recorded its holding at 13.5 tonnes at the end of March, up from 10.3 tonnes in December 2015.

However, the Indian story is different. The country known for its gold-crazy people is seeing people’s demand for gold ETFs and coins drop.

Demand down in India

In the recent March quarter, the demand for gold bars (and coins) in India was 28 tonnes, down by a sharp 31 per cent from 40.9 tonnes in the same period last year. China’s demand for gold coins and bars in this period was up by 5 per cent and that of the USby over 50 per cent.

Data from AMFI also shows that there was a net outflow of ₹69 crore from the Indian gold ETFs in the month of April. In March, they showed a net outflow of ₹105 crore, taking the total outflow from gold ETFs in 2015-16 to ₹903 crore.

Why?

While people from all across the world are betting their money on gold now, why are Indians showing reluctance? There could be two reasons for it. One, unlike in other parts of the world, in India, the bond market has given good returns in the last one year, and investors didn’t feel the need to diversify into gold. Two, the new option for investing in gold, Sovereign gold bonds, has taken the sheen off gold ETFs.

Sovereign gold bonds are more attractive than other forms of investment in gold. The Centre has given capital gains tax exemption on these bonds if held till redemption. And, besides appreciation linked to the market price of gold, these bonds also give an additional coupon payment. In the third tranche of these bonds that was issued in March, the total money collected was ₹329 crore for 1,128 kg of gold. In the previous tranche in January, a total of 3.16 lakh applications were received for a total of 2,872.3 kg of gold. So, the appetite for gold in India still remains, only the form of purchase has changed. But the hitch with sovereign gold bonds is that these do not offer liquidity. For investors who want to exit the bond before maturity, there is no way out, currently. Though the Centre has said that it will list these bonds in bourses, it is yet to do so.

Cues to watch for the week

Last week, gold prices in the international market dropped by 1 per cent to close at $1,273/ounce. The US dollar index edged up from 93.8 to 94.6 following strong US retail sales data.

This week, there are key data releases in the US and bullion market may be very volatile, so watch out. On Tuesday CPI, housing starts data and industrial production numbers will be released. Inflation is expected to have risen in April due to higher prices of gas and housing. On Wednesday, the FOMC minutes will be out.

If there is any softness in the above data points, US dollar may edge lower and give gold a leg up. Gold has a strong resistance around $1,300-1,303. It has to cross this resistance to make further gains, else it will only continue to go sideways. Downside, the next target will be $1,255 and $1,240.

MCX Gold was down a little over 1 per cent last week (to ₹30,034) tracking international gold prices. Rupee was flat for the week, ending at 66.55 versus the US dollar. This week, the MCX gold futures contract may try to move again to ₹30,200 levels. If it holds above this level at least for one trading session, it can make further gains and reach ₹31,000. But, if the contract starts to move south from here, it will eye levels ₹29,000-28,500.

MCX Silver contract looks a little weak as it failed to cross the resistance at ₹42,000 last week. This week, chances for it to slip back to ₹40,000 levels are high.