A new physical gold ETF launched last week allows retail investors to turn their gold shares into 10g gold bars for 750 rupees (£9/$14) fee. It's only available in India but would an ETF like this work in the UK?
According to Nitin Rakesh, CEO of Motilal Oswal Asset Management which designed the new ETF and it's easy-to-redeem gold shares, the product slots neatly into India's existing gold economy.
Rakesh told Gold ETF Investor that many Indians use gold rather than the banking system adding: "I don't think we're providing an alternative (to banks), I think it already exists we're just providing a more efficient way of accessing it."
The product launched on Tuesday last week and on Friday Rakesh said there were around 3,000 investors with about $10 million worth of Motilal Oswal MOSt Shares Gold ETF (MGOLD). The shares are traded on India's National Stock Exchange.
Asked whether he expected investors to cash in their investments for gold Rakesh said: "People will find their own use for the product over a period of time. There could be small gold consumers, people who have small businesses, or jewellers using it for an efficient way to procure gold. There are many ways it could be used and some that we won't expect."
One Indian blogger at One Mint said in review of the ETF: "I think for someone who is looking to invest in gold electronically, a gold ETF with lower expense and higher liquidity is much better than this fund, but I know from comments here that there is a segment of people who are only interested in buying a gold ETF if it promises to redeem that unit into physical gold and I believe this is a good option for them."
However Rakesh said that the ETF was no more expensive than other Indian gold ETFs.
ETF watchers at Index Universe say gold ETFs make up 75% of all the ETF assets in India. Despite this the combined holdings of gold ETFs is only 0.27% of the 18,000 tons of gold in India (according to Motilal Oswal literature quoting GFMS and World Gold Council). But it is growing fast. Mineweb reported that Indian gold ETF assets had increased 161% in rupee terms from Feb 2011 to Feb 2012.
Another aspect of the Indian market is the gold loan industry. Its largest player Muthoot Finance, saw its loan value grow by 114% last year. The firm is believed to make up 19.5% of the gold loan market and at the end of 2011 it had 132 tons of gold backing loans.
The fact that Muthoot lends against physical gold ETF shares is evidence of the flexibility of the Indian gold market. However Muthoot did not respond to questions about the extent of its lending against ETF shares. Nitin Rakesh of Motilal Oswal said: "In principle, it should be a good avenue for both investors and lenders but the data is not very clear as yet."
These loans appear to narrow the gap between financial gold locked into ETFs and physical gold by lending cash against shares as if they were real gold. Meanwhile products like MGOLD takes this a step further by allowing investors direct access to that gold.
Rakesh believes that Indians are rebalancing the way they hold gold. As such he does not expect gold ETF growth to slow down despite increased import duties: "Although the increase in taxation is expected to have a slightly negative impact on gold imports, the ETF demand is not expected to suffer as share gain from other avenues of gold consumption / demand is expected to more than compensate for the same."
In developed markets a product like this could be seen as revolutionary, breaking down the chasm between financial gold and physical gold. In the UK there is only one physical gold ETF that allows investors to convert their ETF shares into gold. That is Gold Bullion Securities (GBS) and only one professional investor, Sebastian Lyon, has used the facility which has a £750 flat fee. In comparison the Indian product allows investors to redeem 10g bars for a fee of around 750 rupees (£9). At the time Townsend Lansing, a director at ETF Securities which manages GBS, said: "As far as I know this is the first time it has gone ahead. Generally, when it has been requested in the past they (the client) start looking at the costs and the process doesn’t look as cost effective as they had originally thought. But this one actually went through. They had made their own cost analysis and then took the required step."
So it is a difficult process for professional investors. In the UK there are no products that incentivise grass-roots ownership of physical gold outside of the financial system. Anyone who does so risks losing out every time they buy and sell.
And yet most retail gold investors - like me - probably don't see gold purely as an abstract financial investment. They also see it as a real-world asset that could be useful in its physical form, outside of an institution. And there are no financial products on the market that acknowledge that (that I know of).