In gold-obsessed India, the landscape for investment in the yellow metal is slowly changing from physical to digital. This gradual shift can be seen in the eight-fold rise of Gold Exchange-Traded Fund (ETF) folios within three years and the launch of 55 tranches of the Sovereign Gold Bond (SGB) scheme by the Government of India since 2015.
Demand For Digital Gold Rises In India…
According to data from the Association of Mutual Funds in India (Amfi), the number of gold ETF folios has gone up from 3.1 lakh to 24.11 lakh between September 2018 and September 2021. During the same period, the combined holding of 11 active Gold ETF schemes moved up by 132 per cent from 15.1 metric tonne to 35.1 metric tonne. One metric tonne is equal to 1,000 kilograms. All Gold ETFs in India are backed by physical gold, so ETF positions are generally expressed in quantum (metric tonne).
The high-speed growth in Gold ETF folios is a reflection of the growing affinity of retail and High Net-worth Individuals (HNIs) towards the digital asset. Today, even salaried youth and millennials are shifting towards digital gold as storing physical gold is difficult and there is trust deficit between buyers and sellers, says Anil Ghelani, Head, Passive Investments and Products, DSP Investment Managers.
SGBs, the most popular digital format of gold investment, are gaining popularity due to sweeteners like tax-free return at maturity and annual interest payment to the bond holder. Since 2015, in 55 tranches, domestic investors bought bonds worth 80.72 metric tonnes of gold, as per Reserve Bank of India data. Interestingly, approximately 50 per cent of total issuance has been done in the last 18 months. In 2020-21, SGBs worth 32.35 metric tonne of gold were issued in 12 tranches, while in the first half of 2021-22, six tranches of SGB worth 17.43 metric tonne were launched.
Gold ETFs were launched in 2007 and SGBs came into existence in 2015, but over 50 per cent of money inflow in these two digital assets has happened in the last two years, says Ghelani.
…But Is Just a Sliver
…Of Global Digital Gold Demand: Though demand for digital gold is up in the country, Indian Gold ETFs’ combined holding of 35.1 metric tonne doesn’t even constitute 1 per cent of the global Gold ETF holding of 3,592 metric tonne. Even the combined holding of Indian digital gold assets in the form of SGBs and ETFs is approximately 115 metric tonne, which is just 3 per cent of the global Gold ETFs holding. Ghelani admits that on a global level, Indian digital gold assets are low, but are gaining ground very fast.
…And Overall Demand in India: It is clear that the demand for digital gold is increasing, but it still represents a paltry portion of the annual demand for the yellow metal in India. In 2020, the total demand for gold was 446.3 tonne, of which just 13.5 tonne was on the back of Gold ETFs. The combined demand of ETFs and SGBs in 2020 was 45.8 metric tonne, which was a mere 10 per cent of the total demand for gold in the country.
The growing investment in digital gold assets is a minuscule part of India’s gold import. As per the January 2021 US Geological Survey’s Mineral Commodity Summary, global gold mine production in 2020 stood at 3,200 metric tonne, which was roughly 75 per cent of total supply. The rest of the supply came from recycled gold.
India imported 376.8 metric tonne of gold in 2020, which was 12 per cent of total mined gold. ETF demand for gold was just 13.5 metric tonne, translating to a meagre 3.6 per cent of total import.
Mammoth Share in Global Demand For Gold
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 per cent of total global gold mine production. As per the US Geological Survey’s Mineral Commodity Summary, global gold mine production in 2019 and 2020 was 3,300 and 3,200 metric tonne, respectively.
According to the World Gold Council, the annual Indian demand for gold in 2019 (before Covid) was 690 metric tonne, which came down to 446.3 metric tonne in 2020. Import of the yellow metal fell further—while India’s import in 2019 was 708.5 metric tonne ($31.2 billion), it came down to 376.8 metric tonne ($21.9 billion) in 2020. At the end of September 2021, 690.7 metric tonne ($41.8 billion) of gold was imported.
The Road Ahead
Though physical gold still trumps digital gold consumption by a big margin, there is immense scope for digital gold to grow.
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. DSP World Gold Fund’s current assets under management (AUM) are Rs 803 crore.