Indian gold funds are shrinking for the first time since June as investors in the biggest bullion-consuming nation follow billionaire George Soros in pulling money from products backed by the precious metal.
Exchange-traded funds in gold saw outflows of 80 million rupees ($1.5 million), data from the Association of Mutual Funds in India show. Investments in sovereign-debt funds rose by 4.46 billion rupees, the sixth straight month of inflows. Gold prices in India have slid 4.3 percent this year, while rupee bonds returned 2.7 percent, the second-highest gains in Asia.
“Globally we are seeing a decelerating gold trend, and overweight investors will be adjusting asset allocations,” Lakshmi Iyer, Mumbai-based head of fixed income and products at Kotak Mahindra Asset Management Co., which oversees about $6 billion of assets, said in a March 14 telephone interview. “We should see some interest-rate easing over the next two or three quarters,” encouraging people to seek capital gains in bonds, she added.
Soros cut his holdings in SPDR Gold Trust, the largest exchange-traded gold product, by 55 percent last quarter, and Goldman Sachs Group Inc. predicts the metal’s 12-year rally will end as a U.S. economic recovery gathers momentum. The Reserve Bank of India will lower its benchmark repurchase rate to 7.50 percent from 7.75 percent Tuesday, according to 30 of 35 economists in a Bloomberg survey. Five predict no change.
“A lot of investors are replicating George Soros in liquidating their gold positions as they might be feeling there is no more requirement for safety in their portfolio,” Kishore Narne, Mumbai-based head of commodities and currency at Motilal Oswal Commodity Broker Pvt. Ltd., said by telephone. “There is a feeling that the worst is over” for the global economy, he said.
Goldman Sachs last month reversed an assumption that exchange-traded gold holdings will expand in 2013, analysts Damien Courvalin and Jeffrey Currie wrote in a Feb. 25 report, after minutes of the Federal Reserve’s January meeting showed several policy makers said the central bank should be ready to vary the pace of its $85 billion in monthly bond purchases.
The Dow Jones Industrial Average climbed to a record on March 14 and the Dollar Index, which tracks the greenback against six counterparts, rose to the highest level since August on March 13 as employment growth surged in the world’s largest economy. Gold prices tend to move inversely to the currency.
Investments in Indian gold ETFs are unlikely to recover in coming months as investors will look for appreciating assets, Kotak Mahindra Asset’s Iyer said.
Technical charts indicate gold futures on the Multi Commodity Exchange of India will probably drop to a support level of 28,700 rupees per 10 grams ($1,645.03 an ounce) within a month, Dhanik Shah, a senior analyst at Angel Commodities Broking Pvt. in Mumbai, said by telephone on March 11. That would be the lowest intraday level since May 18.
While the appeal of gold as an investment has weakened, ICICI Bank Ltd., Royal Bank of Scotland Plc and Quantum Asset Management Co. expect demand for the metal to remain relatively high in India.
ICICI Bank, India’s second-largest lender by assets, estimates the nation’s households hold $1.1 trillion of gold, which accounts for about 7 percent of their total wealth. The precious metal is the predominant form of savings in rural India, where about 70 percent of India’s 1.2 billion people live, Nilesh Mundra, head of investment strategy for private banking at ICICI, said at a conference in Singapore on March 13.
15 Million Weddings
About half of India’s population is younger than 25 years, and with an estimated 15 million weddings expected to take place each year until 2020 the nation is likely to generate demand for an additional 500 tons of gold, according to Mundra. Of the total annual consumption, recorded at 864.2 tons in 2012 by the World Gold Council, 90 percent is imported, he said.
Finance Minister Palaniappan Chidambaram wants to channel some of the wealth locked in bullion into investments to boost an economy growing at the slowest pace in a decade. “Non- productive” holdings, including gold and art, rose by about 800 billion rupees in the year through March 2012, the latest government estimates show. They account for 7.6 percent of India’s investment rate, which is at a three-year low of 35 percent of gross domestic product, according to official data.
India’s “passion” for gold partly accounts for the record shortfall in the nation’s current account, the broadest measure of trade, Chidambaram said in his Feb. 28 budget speech to parliament. He proposed tax benefits to encourage purchases of stocks instead. Gold import duty, which was tripled to 6 percent in the past year after inward shipments rose to a record 969 tons in 2011, was kept unchanged.
Importers including Monal Thakker, president of Amrapali Group in the western city of Ahmedabad, say increasing the levy would boost smuggling. The “status quo” on taxes is a good sign for the industry and will attract people to gold, Bachhraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation, a grouping of retailers, traders and exporters, said last month.
Illegal shipments of the metal were rampant until the turn of the century because of high duties. The levy was increased by 60 percent to 400 rupees per 10 grams in 1999, which was cut to 250 rupees in 2001 to discourage smuggling. Gold imports have been taxed as a percentage of their value since January 2012, after global prices surged 10 percent in 2011.
Gold smugglers were once immortalized by Bollywood, with most villains in the 1970s portrayed as one. Even Indian matinee idol Amitabh Bachchan played the role in the 1975 hit Deewar, which was based on a real-life Mumbai gangster.
To curb unlawful imports, Chidambaram in his latest budget increased overseas travelers’ duty-free baggage limit for jewelry to 100,000 rupees from 20,000 for each woman passenger and 50,000 from 10,000 for a man. The change is the first since 1991, when India opened its economy.
“From the standpoint of Indian households, gold is likely to remain a preferred asset class owing to still-high consumer price inflation,” Sanjay Mathur, Singapore-based head of economic research at RBS, wrote in a March 14 report. “Negative real deposit rates accentuate the appeal of gold.”
Consumer prices rose 10.91 percent in February after a 10.79 percent climb the previous month, a government report showed on March 12. State Bank of India, the nation’s largest lender, pays 8.75 percent on one-year deposits.
The yield on the 8.15 percent government bond due June 2022 rose two basis points Monday, or 0.02 percentage point, to 7.88 percent. Benchmark 10-year sovereign notes offer a premium of 595 basis points over similar-maturity U.S. Treasurys. The rupee weakened 0.3 percent to 54.1750 per dollar Monday.
Bond risk in India has fallen every month since September. The cost to insure the debt of State Bank, considered a proxy for the sovereign by some investors, for five years against non- payment was little changed at 191 basis points on March 15, according to data provider CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Gold prices in India fell in 2013, and were trading at 29,547 rupees per 10 grams as of Monday, after rising each year since 2005. Demand for gold coins and bars has fallen due to a perception abroad that the global financial crisis is ebbing, according to Quantum Asset.
“There is a kind of profit booking as people have made a reasonably good amount of money in gold,” Arvind Chari, a senior fund manager at Quantum Asset in Mumbai, said by telephone on March 15. “What investment demand we had about six months back, might not be the same at the current levels.”
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