It has been a good year for gold exchange traded funds (ETFs). With assets under management almost tripling at the end of October, following the festival season of Diwali, from the year ago period, financial planners across India are advising their clients to add gold ETFs to their portfolio.

Clients have been advised that the strong investment demand will continue well into the new year. Data shows that even as sales of real gold has plunged 26% in the quarter ended September, given the high price of gold, ETFs have nearly tripled.

The high price of gold has ensured that in the quarter, gold jewellery sales were down to 125.3 tonnes from 168.4 tonne in the same period last year. However, ETFs have taken their place.

As planners state, given the historical and contemporary pervasiveness of gold as a store of value, and to a certain extent, medium of exchange, gold has adopted a tendency of behaving like a natural currency. 

“The investment demand for gold tends to rise in the case of adverse economic condition, rising inflation, weakening dollar, or general socio-political instability. The 17.56% CAGR run-up in the gold prices since 2000 has largely been attributable to the surfeit liquidity in the early part of the decade, while in the latter half, the turbulent economic conditions post the sub prime crisis, has continued to contribute to the gold rally,” said L M Iyer, bullion specialist at a broking firm here.

She went on to add that gold exchange traded funds (ETFs) have been on a high in the month of October in India. Data showed that while Birla Sun Gold ETF traded 1.26% up at Rs 2700 ($51.43), ICICI Prudential Gold traded higher by 0.56% up at Rs 2650 ($50.48). Other ETFs like Quantum Gold ETF traded higher 0.51% up at Rs 1290.85 ($24.59), while Kotak Gold ETF rose 0.37% to Rs 2590 ($49.33). Even  SBIGets rose 0.27% to Rs 2640 ($50.29), while Axis Gold rose 0.22% to Rs 2644 ($50.36). Others like Gold Share ETF rose 0.13%, Gold Benchmark Exchange Traded Scheme (GoldBees) rose 0.13% while Religare Gold ETF rose 0.08%.

According to data from the Association of Mutual Funds in India, total assets of gold ETFs jumped to Rs 90.90 billion ($1.8 billion) as on October 31, 2011, from some Rs 30.97 billion ($0.59 billion) a year ago.

Moreover, in September 2010, gold ETF asset under management (AUM) stood at Rs 2,849 crore ($542 million). A year later, it has surged a whopping 219%.

Analysts have pointed out that AUM for mutual funds saw a drop in all categories in September this year except for gold ETFs. On a year-on-year basis, while total AUMs fell nearly 2.5%, gold ETFs have surged a significant 187% in the month of September alone, they said.

Sanjiv Shah, managing director of Goldman Sachs Asset Management told a newswire agency that that more and more people prefer to invest in gold ETFs as compared to physical gold and jewellery, which is the mainstay of most consumers in India.

“Six months to one year down the line, we believe that more and more investments will come into gold through ETFs rather than the physical part of it,” he reportedly said.

Despite the teetered recovery in the global economic environment, the optimistic outlook on gold remains unchanged. According to investment management firm BlackRock, global net inflows into gold exchange traded products totaled $2 billion in October and $7.3 billion in the first 10 months of the calendar year. 

“Traditionally, gold demand in India has a seasonal flavor to it. The Autumnal festivities and onset of the marriage season in India, all come during this phase of the financial calendar. The interplay of these factors provides a potent case for investment in gold in India,” said bullion analyst S Shansher.

As an analyst tracking the market added, most Indians own gold as part of their portfolio, either in the physical format or as jewellery. Since value added tax (VAT) is something which all investors have to pay because it is incorporated in to the price, gold ETFs have an added advantage. Gold ETFs are mutual fund units, hence no wealth tax is applicable on them. 

Besides taxation, ETFs have the convenience of buying and selling and taking the risk on gold. Also, long term capital gains kicks in on ETFs in India only after one year while the one on physical gold kicks in after three years.