Gold no longer holds glitter for investors

Just two years ago, investors were in a frenzy to purchase gold and mutual fund houses were aggressively selling gold funds. But today, neither fund houses nor investors seem to be interested in gold.

Domestic gold ETFs have seen their assets halve in the last two years as investors rushed out of these funds. These ETFs managed assets worth ₹6,655 crore as of March 2015, down from ₹11,648 crore in March 2013.

The gold holding of ETFs is down to 28 tonnes now from 41 tonnes two years back. Motilal Oswal Asset Management recently announced the closure of its gold-backed exchange traded fund (ETF), which was launched in 2012.

Global investors are also behaving in a similar manner. SPDR Gold Trust, the largest global gold backed ETF, has seen a sharp drop in holdings since 2013. The fund holds about 734 tonnes of gold, down from 1221 tonnes in March 2013.

Demand for gold coins and bars, another avenue for gold investment, has also dried up in recent times. A report from the World Gold Council shows that investment demand for gold dropped sharply in 2014. While demand for gold jewellery was down 10 per cent at 2152.9 tonnes, demand for gold bars and coins was down by a sharp 40 percent.

So, why are investors moving away?

The drying up of investment demand for gold in India is mainly due to the restrictions placed on gold imports, including the 80:20 rule — where importers were given an export obligation — in 2013.

Lack of supply has affected fund houses running gold funds adversely. Many mutual fund houses stopped creation of new units in their gold ETFs because of the uncertainty around the import rules.

In an official statement after winding up his company’s gold ETF, Aashish Somaiyya, CEO of Motilal Oswal AMC, said: “With the changes in gold import regulations, there had been a shortage of gold bullion.

The Fund has been unable to cater to physical redemption requests from investors due to irregular availability of required denominations. In such a scenario, where the investor is compelled to sell on the exchange rather than redeem physical gold, it negates the objective of the fund.” Motilal Oswal’s gold ETF was the first gold-backed fund to provide physical redemption, in denominations as small as 10 grams.

The gold import restrictions also created an artificial premium on gold in India.

Gold ETFs traded at about 5-6 per cent premium to their NAV in 2013. This could also be one of the reasons behind outflows from gold ETFs.

Investors could have used the scarcity premium to exit their units at a higher level.

The underperformance of gold in relation to equity is another reason investors could be turning away from gold.

As investors prefer to chase assets that run up, there is a scramble for equity now and gold has been left in the lurch, say fund managers.

In the last two years, equity, both domestic and global, has far outpaced gold.

While the MSCI India index gained 41 per cent between March 2013 and March 2015, gold lost 25 per cent in the same period.

COMMENT NOW