The year 2013 witnessed the Indian government taking a slew of measures to raise the domestic price of gold, like increasing the import duty on gold from 2% to 10%, and mandating RBI’s 20:80 scheme, which states that 20% of imports have to be re-exported. This wide difference between international and domestic gold prices has led to the legal smuggling of gold. This in turn has led to a wide difference of about 10% in the market price of gold Exchange Traded Funds (ETFs) and their Net Asset Values (NAVs). The market price of gold ETFs is based on the domestic price of the metal, while their NAVs are dependent on the landed cost of gold. India’s gold ETFs are losing their value as the gold ETFs prices declined during the year 2013, on account of falling of global gold prices. Gold ETFs turnover fell to Rs. 5.39 lakhs in September 2013. Further, gold demand fell 15% during the year. The following table represents the changes in prices of gold ETFs in India during 2013.
| Investor folios in gold ETFs | ||
| Month | Gold ETFs (Rs.) | Change (Rs.) |
| January 2013 | 569,578 | 94,319 |
| February 2013 | 569,939 | 361 |
| March 2013 | 569,169 | -770 |
| April 2013 | 583,242 | 14,073 |
| May 2013 | 605,881 | 639 |
| June 2013 | 592,573 | -13,308 |
| July 2013 | 587,175 | -5,398 |
| August 2013 | 545,388 | -41,787 |
| September 2013 | 539,231 | -6,157 |
In the year 2013, investors were surprised when gold prices fell and the currency dynamics coupled with government policy measures can lead to a wide difference in global and domestic gold prices. Many global investors sold their gold holdings in 2013, which can be seen from the data of gold holdings in SPDR Gold Shares, which is the biggest gold ETF in the world. Gold holdings have come down by 40% from 1,351 tonnes in December 2012 to 814 tonnes in December 2013.
From financial analysis it is expected that the international gold prices may continue to decrease in 2014. It is being assumed that gold prices may fall below $1000 even in 2014. With the removal of the stimulus package, the interest rates in the US will increase. Hence, gold prices are expected to fall with the increase in interest rates. Though, domestic gold prices have been cushioned against the expected gold price fall in 2014, Indian investors are bearish on the metal as well as the currency. Investors are suggested to be more cautious during the year, and monitor global developments regularly. On the other hand many investors feel that Indian investors need not be worried, as the 1980 gold price crash had not affected India then. There are many others who hold a neutral view on the fate of the metal in 2014. It is suggested to keep tab on the movement of BSE index and the change in INR value. Once it is found that INR is weakening and BSE is moving further upwards, then it is not wise to investment in Gold, taking a cue from the movement of Gold price in 2013. Now, it is required to wait and watch what would be the fate of gold during the current year.
This article was written by Garima Saraff, Analyst with DART Consulting.
