In Gold obsessed India, landscape for gold investment is slowly changing from physical to digital format. This gradual shift could be seen in the fifteen-fold rise of Gold based Exchange Traded Funds (ETFs) folios within four years and issuance of 61 tranches of Sovereign Gold Bond since its inception in 2015. Today, Reserve Bank of India launched 62nd tranche with an issue price of ₹5,409 per unit. First tranche was issued in Nov 2015 with an issue price of ₹2,684 per unit. Each unit consists of one gram of gold.
Sovereign Gold Bonds (SGBs) emerged as the most popular digital format of gold investment due to sweeteners like tax free return at maturity and annual interest payment to bond holders. Reserve Bank of India launched SGBs in 2015 while Gold ETFs came into existence in 2007. Despite late entry, SGBs gold holding of 96.28 metric tonnes (MT) is 149% more than the ETF holding of 38.6 MT.
According to Association of Mutual Fund of India, number of gold ETFs folios had gone up fifteen times from 3.1 lakh to 46.67 lakh between September 2018 and November 2022. During the same period, eleven active gold ETF schemes’ combined holding moved up 156% from 15.1 metric tonnes to 38.6 MT. All gold ETFs in India are backed by physical gold, hence ETFs positions are generally expressed in quantum (metric tonnes). 1 MT is equal to 1,000 kilograms.
The high-speed growth of SGBs and ETFs is a reflection of the growing affinity of retail and high networth individuals (HNI) toward digital assets as storing physical gold is difficult while digital assets are easy to store and transactions are seamless.
Though the gold ETFs folios are growing rapidly but combined holding of 38.6 MT of Indian ETFs is just 1.1% of global ETFs holding of 3,477 tonnes. Even the combined holding of Indian digital gold assets in the form of SGBs and ETFs is approx. 134.88 MT which is just 3.88% of global ETFs holding.
In India, Gold ETFs were launched in 2007 while Sovereign Gold Bond issuance came into existence in 2015 but over fifty percent of money inflow in these two digital assets happened in the last three years.
Digital Gold versus Physical Consumption
Though India's digital gold assets are a small part of global gold digital assets, India has a large global share in demand as well as import of physical gold. Before Covid, in 2019, India imported over 21% of total global gold mine production while in the last calendar year the estimated import is approx. one third of global gold production.
As per U.S. Geological Survey’s Minerals commodity Summary, global gold mine production in 2019 and 2020 stood at 3,300 and 3,200 MT while for 2021 the estimated production stood at 3,000 MT.
Meanwhile, India’s gold import in 2019 was 708.5 MT which drastically came down to 376.8 MT in 2020. But import again picked up in 2021 when India bought a record 984 MT of gold. By September 2022, India imported 515 MT of yellow metal.
As per World Gold Council, the annual Indian demand for gold in 2019 (before Covid) was 690 MT that came down to 446.3 MT in 2020 but again rose to a record 797.3 MT in 2021.
These numbers indicate that cumulative digital gold holding of 134.88 MT is just 13.7% of India’s last year's gold import of 984 MT. It also implies that demand for digital gold asset is increasing but still it represents a paltry portion of annual demand of yellow metal in India. Thus, though digital gold is gaining traction, it is still a small part of India’s gold demand as well as import.
Though physical gold trumps digital gold consumption by a big margin, there is immense scope for digital gold assets to grow. Apart from SGBs and ETFs, gold oriented mutual funds are the third digital option for investment in gold.
DSP is the only asset management company in India that offers a gold oriented mutual fund scheme which is a feeder scheme to Blackrock World Gold Fund. Asset under Management of DSP World Gold Fund stands at ₹784 crore. The Blackrock World Gold Fund invests in overseas gold mining companies.