Filed 20 March 2013, 12:17 IST. Every price, volume and forecast below is reproduced as published on that date and is not a current quotation. For how the benchmarks themselves are set, see how gold is priced.
The outlook for Indian gold exchange-traded funds remained unclear as the funds continued to lose assets while physical demand for the metal held up. The two moved in opposite directions, which looks contradictory until the import regime is put back into the arithmetic: the same duty that raised the cost of a gold coin also raised the cost of the metal an Indian ETF must buy in order to create units.
That is the whole of the inversion. An Indian gold ETF is not a synthetic product tracking a price: it holds physical gold, so it stands in the same import queue, pays the same duty, and absorbs the same landed premium as any other buyer. Duty at 8 and then 10 per cent removed the cost advantage that was the fund's main argument against holding metal directly.
Why the policy worked against itself
The Reserve Bank spent these years trying to redirect household savings from metal into paper, funds first and later sovereign gold bonds. The reasoning was sound in isolation: if savers wanted gold exposure, they could be given exposure without importing metal, and the import bill would fall.
Two things defeated it. The first is that the wrapper was made more expensive by the same duty intended to discourage the metal, so the two instruments moved together instead of substituting for each other. The second is that a large part of Indian gold demand is not for exposure at all. It is for jewellery that is worn, given at weddings, and pledged as collateral in an informal credit system a fund unit cannot enter. No amount of tracking accuracy substitutes for an object that functions as security for a loan from a local lender.
What the fund flows actually showed
Redemptions from Indian funds through 2013 were part of a global pattern: worldwide, physically backed gold funds shed metal heavily after the April price break, and that metal physically left vaults and moved toward Asian buyers. But the Indian case has an additional local driver: the funds were being squeezed by duty at the same time as their unit holders were watching the metal fall, and the two pressures arrived together.
The wider fund story is in the ETF section, the policy sequence in India's gold import regime, and the distinction between owning metal and owning a claim on metal, which is what a fund unit is, in how gold is priced.
What it says about paper gold generally
A claim on gold is only as useful as the things you can do with it. For an institution allocating a portfolio, a fund unit is strictly better than a bar: it settles instantly, costs little to hold and requires no vault. For a household that uses gold as wearable, giftable, pledgeable savings, it is not a substitute at all. Indian policy through these years assumed the first case and encountered the second, and the fund flow figures are the measurement of that mistake.
Questions about this dispatch
Why were Indian gold ETFs losing assets while gold demand held up?
Because an Indian gold ETF holds physical metal, so it paid the same rising import duty and landed premium as every other buyer. Duty at 8 and then 10 per cent removed the cost advantage that was the fund's main argument, at the same time as unit holders were watching the metal price fall. The two pressures arrived together.
Why did the push toward paper gold not work in India?
For two reasons. The wrapper was made more expensive by the same duty meant to discourage the metal, so the instruments moved together rather than substituting. And much Indian gold demand is for an object rather than an exposure: jewellery that is worn, given at weddings and pledged as collateral in informal credit, none of which a fund unit can do.
Is a gold ETF unit the same as owning gold?
Economically it is close, practically it depends entirely on what you want the gold for. For a portfolio allocation the unit is better: instant settlement, low holding cost, no vault. For a household using gold as wearable, giftable, pledgeable savings it is not a substitute. Indian policy assumed the first and met the second.
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https://www.bullionstreet.com/news/india-gold-etf-investment-outlook-remains-murky/4324