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Indian Gold Exchange-Traded Products Unlikely To Affect Local Prices, Demand – Barclays

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By Debbie Carlson

The introduction of gold exchange-traded products will not have much impact on the Indian market because of high costs for the products and a preference to hold physical metal, say analysts at Barclays Capital.

In a research note released Wednesday, the bank said people in India have a different view toward gold than ETF holders in Western countries. “India’s affinity for gold is due to cultural and religious values, as well as being a store of wealth in a liquid, easy to access, tradable form,” they said.

Conversely, ETF holders in the West seek exposure to the physical metal as insurance – hedge against inflation, financial market and economic uncertainty, a portfolio diversifier – yet do not wish to be burdened with its storage and safety.

“Whereas investors in the developed world are comfortable with this notion, in many ways it does not fulfill the desire of Indians wanting to hold a tangible asset that is no-one else’s liability,” the firm said.

The desire to hold physical gold by Indians could keep a floor for gold prices, even as Western holders of ETFs sell because prices are falling. Barclays noted there is not a clear-cut relationship between price and demand in India, rather the Indian gold market responds to domestic customs, cultural and religious patterns. They cited as examples Indian gold demand in 2004, 2005 and 2007 which increased at double-digit rates while prices rose swiftly. “However, demand fell sharply in 2009 as prices hit record highs amid the economic downturn and a poor monsoon season,” they said.

They added that past trends show even during years of high and volatile prices and a poor monsoon season such as 2002 and 2009, gold demand is hampered but does not fall off completely. “Should non-gold financial products become more widely accepted, consumption would fall, but this is likely to be offset by an increase in demand from rural areas due to rising income,” they said.

Although the Indian market is changing with new investment products, more refining capacity and gold reserves replenished, the cultural affinity for the metal is secure. “Without a mass embracing of financial products, gold’s hold is not going to be replaced quickly within the next ten years. We continue to believe the jewelry cushion exists and is set to soften gold’s move lower when investment demand wanes,” they said.

While gold ETFs may not curry favor in India, silver ETFs could make inroads. “Indians do not have the same desire to hold physical silver and view it as a stepping stone to owning gold,” they said.