Gold ETF volumes halve as prices rule high

After seeing record volumes in recent months, gold exchange traded funds (ETFs) seem to have been left high and dry this month.

Average daily volumes in February have been around 50,000 units compared with the last six months’ average of over 106,000 units a day. Experts believe the high gold prices and fiscal year-end phenomenon are responsible for the drop in volumes.

As such, gold prices are ruling steady at higher levels, forcing people to seek diversification to other asset classes.

“Even as gold prices continue to remain high, tight liquidity and higher interest rates are leading people to look for portfolio diversification. Also, the months of February and March typically witness very low investor interest for gold ETFs as the demand for physical gold also goes down,” said Pirthviraj Kothari, director at Riddhi Siddhi Bullion.

Gold ETFs provide a convenient and cost-effective way to take exposure to the commodity as they can be bought in units (equivalent to 1gm of physical gold) and traded like shares on a regulated stock exchange. What’s more, they are backed by physical gold holdings.

Gold has been the best performing asset class in 2010, giving 23% returns. The precious metal has been ruling over `20,000 per 10 gram over the last four months.

“The volatility in gold prices has come down this month and gold prices have now stabilised, which may be the reason for low trading action,” said Vishal Jain, CIO, Benchmark Asset Management.

Some experts believe eGold, a product launched recently by the National Spot Exchange, has eaten into gold ETF volumes, too.

eGold units are similar to ETF units in the sense that one unit is equal to 1 gram of physically backed gold. But the product has an advantage in terms of converting the lower denomination of demat units into physical gold. While in ETFs you can only convert 1,000 units to get 1 kg gold, eGold offers conversion to 8 gram, 10 gram and 100 gram as well. In terms of tax treatment, however, eGold loses out as investors need not pay wealth tax for investing in gold ETFs.

Experts believe the decline in trading volumes is temporary and gold ETFs would continue to see strong interest as the number of retail investors has been growing.

As of end-September, retail folios of gold ETF numbered 2,35,218, constituting nearly 96% of the overall gold ETF folios.

Even the gold collections under ETFs have been growing at close to 75% year-on-year and stood at 14.40 tonnes as on December 2010.

“Even though total volumes would have gone down, we are seeing an large number of retail investors buying in smaller quantity. ETFs offer certain advantages like no wealth tax, no issues related to purity or storage and no extra premium, which one needs to pay while buying physical gold. Though overall gold ETF industry collections are quite small  against 800 tonnes/year consumption in India, we would see gold ETFs growing at a strong pace,” Jain said.