 "Carpet bombing: No more gold ETFs as Sebi curbs new launches")
The government’s paranoia about gold is now turning into madness.
According to a report in the Economic Times, the Securities and Exchange Board of India has rejected proposals from mutual funds to launch new gold exchange traded funds (ETFs).
ETFs are derivative instruments with gold as underlying asset. They are also called paper gold as no sale or purchase of physical gold is required when investing in these products. As an investment avenue, ETFs are not yet hugely popular in India.
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Explaining the rationale behind the move, a Sebi official has told the ET that ETFs have to be backed by physical gold and so launching new ETFs will also increase demand for gold.
“There is no policy decision but no new products are being approved,” the official has been quoted as saying.
The move is surprising, because the authorities until recently were encouraging investing in these funds as they thought it will curtail demand for physical gold. The capital market regulator had allowed these funds to invest in banks’ gold deposit schemes.
Moreover, gold holding by ETFs in India is very low. During April-February 2012-13, India imported 951.17 tonnes of gold for $50.64 billion. For the entire fiscal year, gold holding of the ETFs stood at just 38 tonnes.
So, by banishing gold ETFs the amount of dollar the government will save is minuscule. The move will only put pressure on investors, who already have nowhere to hide from the spiralling inflation.
Instead of taking such steps, the government should be ideally launching better financial products which will insulate investors from inflation. Over the last one year, the only step the government has taken in this direction is launching inflation-indexed bonds. However, because of the structural weakness, these are no great avenues for parking one’s hard-earned money. There are talks that the RBI will come out with a better product in the near future for retail investors.
Any attempt to curtail investment in gold, without opening up other investment avenues will only result in increased smuggling of yellow metal. But that the government probably need not be bothered, because payments made to smuggle gold will not be counted when calculation the current account deficit.