February 20th, 2009 
Tushar Mathur
Indian purchases of paper gold, or exchange-traded funds, have shot up over the past week as the precious metal’s price has rallied, but the volumes are far from replacing those lost in the traditional jewelry sector due to record high prices.
Local spot gold prices soared to a record above 15,500 rupees per 10 grams ($311/10g) Wednesday, and gold ETFs yielded 8% or more within a week to investors otherwise shell-shocked by steep market declines. A week ago, prices were quoted at 14,200 rupees/10 grams.
“Daily volumes on the exchanges have risen to around 80,000 ETF units per day over the week from an average of 30,000 units two weeks ago,” said Sanjiv Shah, executive director with Benchmark Mutual Fund, which has the largest assets under gold ETFs in the country.
Another fund house, Quantum Mutual Fund, has also seen its daily volumes double over the past 10 to 15 days.
“People realize that this is the asset class they need to hold on to at this point of time looking at the global economic scenario,” said Chirag Mehta, associate fund manager with Quantum Mutual Fund.
Investors worldwide have flocked to gold on its safe haven appeal. Around midday in India, spot gold was quoted at $976.65 a troy ounce, down $6.85 from the New York close on profit taking. International traders say there’s an almost universal expectation in the market that gold will breach $1,000 in the near term, given the lack of negative catalysts.
Buyers of gold ETFs in India are mostly retail investors, rather than funds or institutions.
“However, the current rally in prices has seen some interest from institutional investors and demand from them is likely to materialize soon,” said Mr. Mehta.
He said many investors will hold on to their gold assets over the longer term as people expect inflationary pressures to return after global economies revive, due to sharp increases in the money supply in global markets and major economies as a result of stimulus packages.
According to latest data, assets in India’s gold ETFs rose 4.5% in January to 7.67 billion rupees ($153.7 million) from 7.34 billion rupees in December. Indian ETFs were holding a total of about five tons of gold in January.
Despite rising interest in ETFs, the volumes of metal are nowhere near to replacing the normal levels of demand for physical gold in India, which has been importing 700 to 800 tons annually, primarily for jewelry.
Indians consider it auspicious to buy or give gold during marriages and religious occasions, but the recent price increases have cut jewelry demand drastically in the middle of the usually-busy wedding season.
Gold imports in January fell to around one-to-two tons from 16 tons in the same month a year earlier.
Gold ETFs were launched in India in early 2007. Five fund houses — Benchmark Asset Management Co., Kotak Mahindra Mutual Fund, UTI Asset Management Co., Reliance Capital Asset Management Ltd. and Quantum Mutual Fund — currently offer gold ETF products in India.
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