"...India is the world's largest gold market by far - and it's going to get its first exchange-traded gold fund (ETF) in the next two months. Get ready for a deluge of bullish analysis..."

On the day rumors broke that platinum might soon get its own ETF, the white metal rose nearly 7%...

Silver rose more than 55% between SEC approval and the launch of the SLV fund last May...

And now Kotak Mahindra Bank has filed a draft offer for its Kotak Gold fund with the stock exchange authorities in Mumbai. Get ready for a deluge of bullish analysis online!

But US, European and Australian investors would do well to remember that India is very much another country - not least in how its private citizens buy and sell gold.

Gold already has "the highest penetration of any other financial product," as Kotak's K.V.S Manian said in a recent interview. Gold reaches so deeply into India's household finances, in fact, that private individuals in India are now thought to own between 13,000 and 15,000 tonnes of gold - up to 10% of the world's entire above-ground stocks.

That's a larger hoard than the US, German and French governments put together. India's private sector swallowed one ounce in every five sold anywhere in the world last year!

So will gold-backed shares really unleash fresh demand - or simply cannibalize India's jewelry and small bar market? "[Gold] is an integral part of Indian culture," says David Gornall, director of Natexis Commodity Markets Ltd. "In the same way that the recently-paid British worker spends some cash on a Friday night curry, the Indian worker pays a Friday night visit to the local jeweler."

Gornall reckons that the primary attraction of gold jewelry in India has been for investment first and adornment second - and no wonder. The Rupee has sunk from 8 per US Dollar to 48 per Dollar since 1975, but private individuals face big problems hedging their assets overseas. They can't invest in overseas equities, for example, unless they work for the company in question.

And all this time, the Indian money supply has risen more than 200 times over. It surged more than 16% in 2003/4, according to analysis by Shailendra Kakani of CommodityResearch.In.

It's no surprise, therefore, to see India's annual demand for gold trebling since 1991, when restrictions were lifted on gold imports and gold-bar investment. The most popular time to buy gold jewelry remains religious rather than tax-efficient, however. Diwali, the start of the Hindu New Year, normally takes place in October or November. But the festival of Akshaya Thrithiya, falling in April or May, has also become a red-letter day for Indian jewelers - thanks in part to their own marketing push.

"Purchases on this day are considered auspicious; it is the third most auspicious day in the Hindu calendar," says the World Gold Council in a special report. "Over the past five years, Akshaya Thrithiya has become a major gold-buying occasion in the South of India, especially in the State of Tamil Nadu, where sales have reached record levels.

"Since 2005, the idea has been promoted across the North and West of the country, which has also resulted in a significant rise in gold sales in these regions."

Anyone watching the gold price in spring 2006 could see the impact of Akshaya Thrithiya, even if they didn't recognize it. Versus the Indian Rupee, gold had become almost 10% more expensive during the first quarter of 2006. Year-on-year, that meant demand from India's jewelers had dropped by more than one third.

But as this major Hindu festival-day drew near at the end of April '06, India's jewelers - caught short of inventory - were forced to stock up on physical gold. They finally bought amid the great buying frenzy which pushed gold up from $550 in March to $720 in mid-May. And it was a good job they did!

According to the Times of India, all of Bangalore's 2,000 gold shops "were choc-a-bloc" with customers last spring. Across the four states of southern India, 70,000kg of gold jewellery was sold in one day. The number of shoppers rose 50% from 2005.

Just how tight might India's jewelers squeeze the global gold market this April? If the huge upturn in demand going into Diwali last October proves any guide, Akshaya Thrithiya in April '07 could be dramatic. Suresh Hundia, president of the Bombay Bullion Association, says India's gold consumption more than doubled in the month before Diwali, up from 70 tonnes to 156 tonnes.

But don't call your broker to buy a fistful of June gold calls just yet! "A feature of Indian demand is its extreme sensitivity to price volatility," notes Kotak Bank in the prospectus for its own gold ETF. India's consumer-investors are wary about buying necklaces and bracelets on a spike, only to watch the price fall back.

It's not that India won't buy gold when the price is rising. Gold spending increased by more than 71% in the four years to 2005, even as the gold price rose by a third in Rupees. But India's consumer-investors will walk away if the price gets too volatile - and that means the frantic price-action marking 2007 so far might cap final-end sales, even if Indian jewelers are using the current setback as a chance to buy new stock.

The problem to date has been liquidity. Until now, "India [has been] a one-way street when it comes to investment," says David Gornall at Natexis. "The export of scrap is illegal, so the only method of liquidating golden assets is to sell back to the jewelers who, if they are in a generous mood, might charge between 10 and 15% of the value - not the most attractive bid/offer spread for an investor."

Kotak's gold ETF, by comparison, is going to charge 4% in and 1% out on a minimum investment worth $1,200 at today's exchange rate. What might that mean in a gold market - the biggest in the world, remember - where volatility priced in rupees shows a clear inverse relationship with gold sales by value? Could the ETF in fact mark the switch from hoarding to trading in the world's No.1 gold market?

That's not to say the arrival of gold ETFs in India this spring will harm the gold price. And we should welcome anything that adds liquidity to this market - even if India's ETF buyers will only get unallocated gold as "backing" for their paper equities.

But you might want to beware overly bullish analysis on Western websites as this story builds. Don't simply look at the existing gold ETFs - in Australia, the United Kingdom, South Africa, the US, France, Mexico, Switzerland, Turkey and Singapore - and assume India will use this new vehicle in exactly the same way.

The gold ETFs launched in the developed world so far have become remarkably sticky. Their holdings fell just 5% during the 25% price drop of May-June '06. The biggest ETFs then saw fresh buying as the price bottomed, taking their assets to a fresh high above 17 million ounces.

This is just the kind of behavior Indian gold buyers already display - buying the dips and sticking with corrections. "Such an atmosphere of holding, not folding, naturally places upwards pressure on prices," as Robert Schiller reminds us in Irrational Exuberance.

In short, India's forthcoming gold ETF could act as much more than just "one more investment avenue," as a Mumbai-based analyst termed it last month. Unless Kotak Gold creates new gold demand - rather than cannibalizing the jewelry and small bar market - the ETF could actually give Indian investors the chance to take profits and sell out as the global price rises.

That's to be applauded, we think. But the short-term impact of India's first gold ETF shouldn't be overplayed.