Gold imports are said to be responsible for India's worsening current account position. And indeed gold imports as a percentage of GDP have been rising steadily over last few years. You see, from 1.3% in 2007-08, gold imports rose to 3.0% in 2011-12 as a percentage of GDP. The appetite for holding gold in India is insatiable and people buy gold through all possible modes, but mainly in the physical form. Over the years, having understood benefits of buying gold in paper form, investors have preferred an Exchange Traded Fund (ETF) route to buy gold for last few years.
 

Steady growth in demand for gold

(Source: DGCI &S, RBI, PersonalFN Research)  

Assets under Management (AUM) of gold ETFs rose from mere Rs 423 crore in July 2007 to Rs 10,703 crore in July 2013, which is close to a 2500% jump in just 5 years. Moreover, the physical holding of gold with Gold ETFs nearly doubled to 38 tonnes in March 2013 from 19 tonnes in March 2011.

Indian government has taken multiple measures to curb India's gold imports. It has increased import duty on gold 3 times so far in 2013. It has imposed restriction on banks and authorised bullion dealers with an aim of pushing down the gold demand. In congruence with these policies of the government, Securities and Exchange Board of India (SEBI) recently turned down requests of mutual funds to launch new gold ETFs. In January this year, the regulator had allowed some mutual funds to launch gold ETFs. However, then too it had taken cautious approach and had encouraged them to invest upto 20% of their assets in gold deposit schemes promoted by banks. This was a move aimed at utilising idle gold in efficient manner. But now SEBI has taken a tough stance and has declined to approve new gold ETF launches. The regulator is of the view that, proliferation of gold ETFs may fuel demand for gold. India has already imported 338 tonnes of gold in the first quarter of current fiscal.

PersonalFN is of the view that, although the stance taken by SEBI is appropriate considering India's fragile position in managing current account deficit. Although turning down approval to new gold ETFs may be a right move, it may help little in curtailing actual imports. Even today, share of gold ETFs in total gold demand of the country is well under 5% and thus insignificant. It is noteworthy that, while government is trying to clamp down gold imports, demand for gold still remains high. This is quite evident from the estimated spurt in smuggling of gold which has nearly doubled from April to August. It is believed that nearly 60 tonnes of gold has been smuggled in India since the beginning of this fiscal through August 2013. (which is about 1.8 times of the total AUM of Gold ETFs). PersonalFN believes that it may be difficult for the government to discourage the demand for gold. Instead of that, monetisation of gold may help. It will not only reduce imports but would help utilise idle gold. India has nearly 31,000 tonnes of commercially available gold.

PersonalFN is of the view that, people shouldn't speculate about gold prices and should avoid buying gold in grey market. Gold ETF still remains the most desirable mode of buying gold for the purpose of investment. You should have 10%-15% of your portfolio in gold, the asset that acts as insurance of your portfolio.

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