Gold investment landscape in India is slowly turning from physical mode to digital. Gold ETFs and sovereign gold bonds (SGBs), collectively known as digital gold, are emerging as the preferred route of investment for retail investors. In last two years, there has been an eight-fold increase in gold ETF folios, while asset under management (AUM) of these ETFs grew by over 200%.
As per Association of Mutual Fund Industry (AMFI), gold ETF folios have gone up from 4.23 lakh to 32.09 lakh between December 2019 and December 2021. Similarly, AUM of gold ETF schemes increased from ₹5,768 crore (equivalent to 14.8 metric tonnes) to ₹18,405 crore (equivalent to 37.6 metric tonnes) of gold holding.
A gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. Currently, there are eleven active gold ETF schemes by various mutual fund houses. As per RBI norms, all ETF schemes are backed with physical gold, so ETF positions are generally expressed in quantum (metric tonnes). One metric tonne is equal to 1,000 kilograms.
Rise of sovereign gold bonds
To assuage the thirst of gold-obsessed India, RBI launched sovereign gold bonds in November 2015. Since 2015, in 57 tranches, domestic investors have bought bonds worth 86.32 metric tonnes, as per RBI press release dated December 07, 2021. Moreover, over 55% of total issuance has been done in the past 21 months. In 2020-21, SGBs worth 32.35 metric tonnes of gold were issued in 12 tranches, while in 2021-22 over 23 metric tonne of gold were issued till December.
Though, sovereign gold bonds came eight years after gold ETFs, which were introduced in 2007, SGBs have captured the imagination of investors at a brisk pace. Cumulative gold holdings of SGBs are 129% more than ETFs. Government of India backed SGBs are gaining popularity among millennials and HNIs due to sweeteners like tax-free return at maturity and annual interest payment to bond holders. Primarily, money inflow in both the digital assets has gained ground in the past 2 years, reflecting the rising popularity of digital gold.
Gold ETFs and gold bonds are ideal for investors who wish to invest in gold but do not want to buy physical gold due to the storage problems or doubt over purity. Moreover, there is no premium or making charges associated with digital gold, and in SGBs you get tax advantage. Also, an investor can purchase as low as one gram of gold through SGBs and ETFs but it rarely happens in physical buying of gold.
Miles to go for Indian digital gold
Though demand for digital gold has grown manifold in recent times, Indian gold ETFs combined holding of 37.6 metric tonnes is barely over 1% of global gold ETF holding of 3,570 metric tonnes. Even the combined holding of Indian digital assets in the form of SGBs and ETFs is approximately 124 metric tonnes, which is just 3.5% of the global gold ETFs holding.
For a gold fascinated nation, digital assets are still very low, but gaining ground rapidly. Stringent KYC norms followed by gold retail outlets, rising financial literacy, government push for non-cash transactions, increased urbanisation and financial inclusion has changed the landscape of gold investment in India. On top of it, interest payment to SGB holders has pushed gold as a paper asset in recent years.
Not only on global front, but on the domestic side too, digital gold represents a paltry portion of the annual demand for the yellow metal in India. In 2020, the total demand for gold was 446.3 tonnes, of which just 13.5 tonnes was on the back of gold ETFs. The combined demand of ETFs and SGBs in 2020 was 45.8 metric tonnes, which was a mere 10% of the total demand for gold in the country.
The growing investment in digital gold assets is a miniscule part of India’s gold import. As per the January 2021 U.S. Geological Survey’s Mineral Commodity Summary, global gold mine production in 2020 stood at 3,200 metric tonnes, which was roughly 75% of total supply. The rest of the supply came from recycled gold. India imported 376.8 metric tonnes of gold in 2020, which was 12% of total mined gold. ETF demand for gold was just 13.5 metric tonnes, translating into a meagre 3.6% of total import.
India key to global gold demand
Though digital gold assets in India are a small part of global gold digital assets, India has a large share in the global demand as well as import of physical gold. In 2019, India imported over 20% of total global gold mine production. As per the U.S. Geological Survey’s Mineral Commodity Summary, global gold mine production in 2019 and 2020 was 3,300 metric tonnes and 3,200 metric tonnes, respectively. According to the World Gold Council, the annual Indian demand for gold in 2019 (before Covid-19) was 690 metric tonnes which came down to 446.3 metric tonnes in 2020. Import of gold fell further — while India’s import in 2019 was 708.5 metric tonnes (worth $31.2 billion), it came down to 376.8 metric tonnes (worth $21.9 billion) in 2020. At the end of September 2021, 690.7 metric tonnes ($41.8 billion) of gold was imported.
To be sure, three quarters of gold consumption in India is in the form of ornaments, an indicator that still physical gold trumps digital gold consumption by a big margin.
Apart from SGBs and ETFs, gold oriented mutual funds are the third digital option for investment in gold. Currently, DSP Mutual Fund is the only asset management company in India that offers a gold-oriented mutual fund scheme, a feeder scheme to Blackrock World Gold fund through which DSP Mutual Fund invests in overseas gold mining companies. By the end of December 2021, DSP World Gold Fund’s AUM stood at ₹930 crore, as per AMFI website.