Gold ETF to shine in 2-3 years

The popularity of gold exchange traded funds in India is likely to rise substantially over the next two to three years as more market players get acquainted with the product, Paul Walker, chief executive officer of the UK-based research body GFMS, told NewsWire18.

He was speaking on the sidelines of the fourth India international gold convention here on Friday.

"There will be steady growth in this as fund managers become more comfortable with the idea of ETFs, how it works, what the downside risks are, what the upside risks are of holding gold in their portfolio and it will be a gradual process of education," Walker said.

He cited the example of the US where due to the long delay in launch of ETFs, there was heavy pre-education and pre-marketing. This benefited ETFs tremendously as by the time it was launched people already knew what it was and were receptive to the idea of trading gold as a paper product.

"Gold has always had an attraction as a safe haven investment. In the next few years with Indians' attraction to gold, the large investment funds, the pension funds and so forth will start to look at gold as a realistic alternative," Walker said.

Walker expects that there will be steady growth in this product as fund managers become more comfortable with the idea of ETFs, how it works, what the downside risks are, what the upside risks are of holding gold in their portfolio and it will be a gradual process of education.

He feels that it is important to educate investors about whether the funds they are investing in are allowed by the regulator to invest in gold and what kind of investments the fund is permitted to make.

But Walker conceded that there are many people in India who enjoy the anonymity of holding physical gold which will be lost if they invest in ETFs as it will then fall under the regulatory framework and also be subject to taxes.

Investment demand
Investment demand has been the underlying driver of gold prices, Walker said.

However, India and China have been somewhat disappointing on investment demand.

"In China this is because gold has had to compete against phenomenal growth in stock markets in Asia," the GFMS head said. According to him, the investment opportunity in property and equity markets has constrained people's willingness to invest in gold.

In India, demand has been changing. Growing investment in coin and bars over the last couple of years indicates that India is witnessing a definite secular shift from jewellery into coins and bars, he said.

"At present, Indian demand is still driven by retail buying and for the Indian market to go forward it is important to get institutions involved, and encourage them to take positions," Walker said.