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FE INSIGHT
DEBATE: PERSONAL FINANCE
 
Gold ETFs are a tried and tested investment option
Posted online: Wednesday, July 20, 2005 at 0000 hours IST
 
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 Global gold stocks are worth approximately $2,000 billion. As per GFMS reports, over 23,600 tonnes of gold, worth approximately $326 billion, is held by individuals. The net world investment flow for 2003 alone is estimated at over $11 billion.

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Besides a strong investment pattern in physical gold products, like coins and bars, structured products and gold exchange traded funds (ETFs) are lately generating significant interest among individuals globally. There are over 600 exchange-listed structured gold products with a turnover of over $5,000 billion.

There are several types of gold ETFs, like open-ended funds, closed-ended funds, and unit investment trusts. Bullion ETF shares are generally backed by gold bullion bars held by the custodian for the fund. Gold ETF shares trade on the Australian Stock Exchange, London Stock Exchange and the New York Stock Exchange. The new gold ETFs have greatly increased demand for gold, by making it available to institutional and retail investors globally.

Then, there are Street Tracks’ gold shares, listed on the NYSE. In this case, gold shares represent fractional, undivided beneficial ownership interests in the trust, the sole assets of which are gold bullion, and, from time to time, cash. Each share is supported by one-tenth of an oz of gold held in custody. This product lowers barriers, like access, custody and transaction costs, that have prevented some investors from investing in gold and using it as an asset allocation and trading tool.

Street Tracks has been set up in the form of an investment trust. The product is sponsored by World Gold Trust Services (owned by World Gold Council) and its custodian is HSBC Bank, US.

It has performed well since inception, primarily because a large transaction volume supports the product. The structure of the product is regulated by US authorities, like the Securities & Exchange Commission, whose approval is necessary before the launch of GETF. Then NYSE listing norms have to be complied with.

Indians buy gold worth over Rs 40,000 crore every year and Indian households hold over 7% (over 15,000 tonnes) valued at over Rs 945,000 crore of the global stocks of gold. A research conducted by Sebi-NCAER shows that Indian households in urban India hold over 10% of its assets in gold. These facts provide enough empirical ground to support the cause for a gold or gold-backed investment option today. Today’s India is not just young and educated, but dynamic and enterprising as well, and is in search of a global asset class whose efficacy is tried and tested in more competitive markets of the world.

Besides, investing in gold ETF has numerous advantages, which make it an attractive investment avenue, compared with investment in gold. For instance, it is cost-effective. Transaction costs are expected to be much lower than those associated with the purchase, storage and insurance of gold bullion in a traditional account.

It is liquid. Its structure allows for baskets to be created and redeemed according to market demand, creating liquidity. It is convenient. There’s a platform for individuals, trust funds and to hold gold in demat form, without the risk and hassles of handling physical gold. It’s easily accessible, like any other MF product. And there is quality assurance since transactions are backed by LBMA -approved physical gold bars.

At present, regulators are in the process of defining norms and formulating guidelines for the Indian market to enable gold ETF products. This process is expected to be completed within the next few months. A few leading asset management companies have already expressed interest in gold ETF products and are proactively working on structuring products to take advantage of the positive regulatory environment, when it happens.

The writer is MD, World Gold Council

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