1. Case for Gold ETFs to invest in Gold Futures
Dr V Shunmugam

2. India Gold Demand Trend (in tonnes)
Substituting India’s Gold Physical Investment Demand With Paper Backed Instruments
India Gold Demand Trend (in tonnes)
2014
2015
2016 (Jan-Sept)
Jewellery demand
662.1
663.1
340.4
Total bar and coin demand
180.6
195.1
100.7
Consumer demand
842.7
858.1
441.2
Source: WGC
Huge gold imports a drain on current account
Channeling just 50% of this annual investment demand to paper backed instruments would save around USD 5 billion annually
This USD 5 billion is enough to add 5,000 MW power plant capacity
Need for a market driven product, that do not strain the government finances

3. Govt. Is Serious About Weaning Away Indians From Physical Gold
Issue
Issue Date
Issue Price (Rs.)
Total No of Applications Received
Collected Amount (Rs Crores)
Worth of Gold (in Kg)
1st Tranche
26th Nov 2015
2,684
62,169
246
916
2nd Tranche
8th Feb 2015
2,600
3,30,000
798
3,071
3rd Tranche
29 Mar 2016
2,916
64,000
329
1,128
4th Tranche
22nd July 2016
3,119
1,95,000
919
2,676
5th Tranche
23rd Sep 2016
3,150
> 2 lakh
820
2,300
6th Tranche
24th Oct 2016
2,957 -  -
Cumulative
7,51,169
3,112
10,091
The Sovereign Gold Bond Scheme (SGBS) promulgated for diverting public savings towards paper gold, rather than physical gold.
In the 6 tranches of SGBS so far, more than Rs.3,100 crore has been collected which is worth about 10 tons of gold.

4. Rise and Fall of Gold ETF AUM and Prices
Considering Gold ETFs invest a minimum of 80% AUM in physical gold, the holding during the period was tonnes

5. Current regulations governing Gold ETFs
Mutual fund invests primarily in gold or gold related instruments
Gold related instrument – having gold as underlying, as specified by the board from time to time
Assets may be kept in custody of a bank, registered as a custodian with the Board
Money be invested only in gold or gold related instruments,
Except to extent necessary to meet liquidity requirements for honouring repurchases or redemptions
Such funds be invested in short-term deposits of scheduled commercial banks
SEBI circular - Dec 31, 2015 designated Gold Monetisation Scheme (GMS) as gold related instrument - total investment in GMS to not exceed 20% of AUM

6. Proposal: Gold ETFs with exposure in gold derivatives
Current Investment Structure
Currently, Gold ETFs investing in gold (87%), gold monetization scheme (12%), while rest in debt market
New Investment Structure:
Gold ETFs may take exposure to gold via gold derivatives such as gold futures contract
Exposure through futures would entail only margin payment + daily MTM payments, rest can be invested in debt market, yielding collateral return
In gold futures it is assumed that the contracts will be rolled over two days before the start of tender period in a single day (for simplicity)
Gold futures being normally in contango, the cost of rollover is accounted for in the gold futures returns
Net exposure to gold limited to 100%

7. Gold ETF + Futures = Gold Hybrid Fund – Offers Higher Returns
Gold ETF + Futures = Gold Hybrid Fund (Jan ‘15 to Jun ‘16) 
Contract
05 Feb 2015
03 Apr 2015
05 Jun 2015
05 Aug 2015
05 Oct 2015
04 Dec 2015
05 Feb 2016
05 Apr 2016
03 Jun 2016
05 Aug 2016
Buy Date
01 Jan 2015
28 Jan 2015
27 Mar 2015
27 May 2015
29 Jul 2015
28 Sep 2015
26 Nov 2015
27 Jan 2016
29 Mar 2016
27 May 2016
Buy Price
26,700
27,856
26,831
27,119
24,929
26,741
25,423
26,830
28,979
28,841
Sell Price
27,759
26,569
26,877
24,720
26,504
25,281
26,749
28,743
28,603
31,199
Sell Date
30 Jun 2016
Returns %
0.04
(0.05)
0.00
(0.09)
0.06
0.05
0.07
(0.01)
0.08
Index Value
1,039.66
991.63
993.33
905.46
962.66
910.10
957.57
1,025.85
1,012.54
1,095.32
Gold ETF
1,045.78
985.00
1,004.01
928.21
980.03
940.95
988.23
1,035.32
1,091.50
1,130.66
Difference %
0.612%
-0.663%
1.068%
2.275%
1.737%
3.085%
3.066%
0.947%
7.896%
3.534%
Portfolio
Risk free rate
Portfolio Size
Initial Margin for Futures
Gold
Gold Futures
Debt
Cash/CBLO
85.00%
15.00%
13.50%
1.50% 6%
1000 5%
PORTFOLIO RESULTS
Exit Date
888.9
837.2
853.4
789.0
833.0
799.8
840.0
880.0
927.8
961.1
Cum. MTM Loss/Gain
5.9
(1.3)
(1.0)
(14.2)
(5.6)
(13.5)
(6.4)
3.9
1.9
14.3
Debt Capital
135.0
Rf return Debt
0.6
3.2
4.6
6.0
7.3
8.7
10.1
11.4
12.1
Cash Provision
15.00
TOTAL
1,045.46
987.88
1,005.65
929.43
983.42
943.62
992.31
1,043.95
1,091.02
1,137.48
Margin Utility
7.80
7.44
7.45
6.79
7.22
6.83
7.18
7.69
7.59
8.21
RETURNS (%)
Time Duration
1 Month
3 Months
5 Months
7 Months
9 Months
11 Months
13 Months
15 Months
17 Months
19 Months
GETF
4.6%
-1.5%
0.4%
-7.2%
-2.0%
-5.9%
-1.2%
3.5%
9.1%
13.1%
Gold ETF + Futures
4.5%
0.6%
-7.1%
-1.7%
-5.6%
-0.8%
4.4%
13.7%

8. Gold ETF + Futures = Gold Hybrid Fund
The difference between the gold ETF and gold hybrid is smaller in 17 month due to higher roll over cost and fall in gold prices
Ratio/Months
85-15
80-20
75-25
70-30
60-40
50-50
1 Month
-0.03%
-0.04%
-0.05%
-0.06%
-0.08%
-0.11%
3 Months
0.29%
0.38%
0.48%
0.58%
0.77%
0.96%
5 Months
0.16%
0.22%
0.27%
0.33%
0.44%
0.55%
7 Months
0.12%
0.20%
0.25%
0.41%
9 Months
0.34%
0.45%
0.56%
0.68%
0.90%
1.13%
11 Months
0.36%
0.53%
0.71%
0.89%
13 Months
0.54%
0.82%
1.09%
1.36%
15 Months
0.86%
1.15%
1.44%
1.73%
2.30%
2.88%
17 Months
-0.10%
-0.13%
-0.16%
19 Months
0.91%
1.14%
1.82%
2.27%

9. Gold ETFs with exposure in gold derivatives
Benefits
Enhanced total return compared with physical gold based scheme
Turns asset management to paper gold than physical gold
Underlying of Gold ETFs can be 100% gold, unlike 90% - 95% currently
Reduction in cost on storage, insurance and security of physical gold
Backed by strong price discovery mechanism with wide participation
Good correlation of 94%-96% of Gold futures component (used in new model) with MCX gold spot and Gold ETF prices
Regulation
Gold derivatives contract such as gold futures contract should be designated as gold related instrument by SEBI

10. Gold Futures Based Funds – Global Experience
ETF Name
Total Assets (USD Million)
PowerShares DB Gold Fund
198.45
DB Gold Double Long ETN
106.30
Ultra-Gold ETF
89.07
VelocityShares 3x Long Gold ETN
74.88
UltraShort Gold ETF
69.40
DB Gold Double Short ETN
41.13
Gartman Gold/Euro ETF
19.77
Power Shares DB Gold Short ETN
18.78
VelocityShares 3x Inverse Gold ETN
18.62
Gartman Gold/Yen ETF
18.32
ETRACSCMCI Gold Total Return ETN
6.27
Source: ETFDB.com, as on December 20, 2016
Total AUM

11. THANK YOU