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Gold ETF – why you must consider it in your portfolio?

Published : September 1, 2017

Gold ETF - why you must consider it in your portfolio

Gold ETF is a new and innovative kind of instruments available for all types of investors, especially for the risk-averse. Physical gold is the underlying from which these ETFs derive their value.

Physical gold has their inherent risk characteristics. The important one is theft, storage, and safety. Gold ETF overcome these limitations. The main purpose of holding gold in physical form is capital appreciation. ETF fulfill this purpose also.

Let’s understand about Gold ETF, its present status in the global scenario and in India. Also, some reasoning why every individual must hold gold in ETF form at least.

Indian investors must understand the very utility of ETFs of gold in line with the global investment community. They should come forward to add gold ETFs to their portfolio. This will protect themselves from high volatility and rising inflation. At the same time will support the government in reducing gold imports to curb fiscal deficit of the nation.

Gold Exchange Traded Products (ETPs)

Gold ETF is the short form of gold exchange traded fund. It is a type of gold exchange-traded products (ETPs). There are other types of gold ETPs also like, closed-end funds (CEFs) and exchange-traded notes (ETNs).

Trading in gold ETPs is facilitated on the major stock exchanges across the globe. Each gold ETF, ETN, and CEF have a different structure. This is generally outlined in their prospectus. Gold ETFs and CEFs are both backed by physical gold. While gold ETNs track the price of gold using derivatives and use it as underlying.

Gold ETPs – History

The first gold ETPs was issued in 1961 by Central Fund of Canada by the name Central Fund which is a closed-end fund. In 1983 it amended its articles of incorporation and allowed exchange-tradable product for ownership of gold and silver bullion. Central Fund is listed on the NYSE since 1986 by symbol CEF and on the Toronto Stock Exchange since 1966 by symbols: Cdn. $ CEF.A and U.S. $ CEF.U.

In India, the idea of gold ETFs was conceptualized by Benchmark Asset Management Company Private Ltd in May 2002. But SEBI did not provide with approval to it. In March 2007 the first gold ETF was launched as GS Gold BeES and since then it is traded on NSE. The first gold ETF actually launched was Gold Bullion Securities, which listed 28 March 2003 on the Australian Securities Exchange.

When compared to global ETF investments, India had only $902.33 million of funds deployed in twelve odd gold ETFs listed on National Stock Exchange as on 29 January 2016 as against $49857.69 million of funds poured in thirty world major gold ETF as is depicted in the following graph.

It is also worthy to note here that India mostly remains among first third when comes to global gold imports. This is according to World Gold Council.

Link to Global Gold ETF Data – Global Gold ETF

Link to India Gold ETF Data – India Gold ETF

Current Scenario of Indian gold ETFs

The current section is explaining the scenario of worldwide gold ETFs for last five years. In 2013 a very heavy outflow of funds from these ETFs was there. This was over $20000 million worth. A very little investment was poured into it in 2014 and 2015. In the first two months of 2016, a whopping $6516 million was poured into gold ETFs globally which is suggesting for support in gold prices at $1220 per ounce in days to come.

Now an important question is that why globally investors suddenly had turned towards gold ETFs, after remaining silent for almost two years in a row. The answer lies in the very high volatility in other asset classes had attracted investor class towards these comparatively safer ETFs which not only will support appreciation in value but also will act as a hedge against high volatility in other asset classes and inflation.

Why consider gold ETF in your portfolio?

It can’t be denied that despite the availability of various investment options to investors, gold still holds a prominent place. Globally, almost 40% of mined gold is held for investment purpose. And India is no exception. Being an agrarian prominent economy, besides land, gold is being the main alternative for investment, at least in rural areas.

Coming on physical gold, it is becoming costlier day-by-day. Also in physical form, it’s quite illogical to buy it in lower than sellable denomination. For example, buying 10 gram or gold ornaments in 99% accuracy will cost above Rs.30000 as of now. Now for a small Indian saver, this amount is little high.

Now, holding gold in physical form has its own inherent risk of theft and storage as well as safety concerns. One needs to hold gold in paper form to overcome these limitations. This is the good available alternative to the mass.

An alternative to the physical buying of gold is to buy it in paper form in parts and liquidate it later on as and when required to buy it back in physical form. This will solve two basic problems at a time for any small savers who need gold for different purposes but cannot buy it due to huge cost involved. Gold ETF, traded on NSE platform is a perfect alternative and serves solution for this.

Further, not only among Hindus, in other religion too buying gold is a kind of necessity, especially during marriages and or for pure investment purpose. Gold ETF in India works similarly in line with its global peers. At the same time, ETF’s in gold also incorporate several benefits of mutual funds while the core value of Gold is kept intact.

Major source of gold ETF in India

At present, there are over a dozen of Gold ETF’s which is traded on NSE platform on daily basis. However, GOLDBEES, KOTAKGOLD, RELGOLD, SETFGOLD, and GOLDSHARE are most liquid among others. The rate of KOTAKGOLD is one tenth of one gram of physical gold price. The rate of all other ETF’s is quoted at one gram of physical gold price.

So, it is always wise for planning and implementing a systematic investment in gold through ETF. This will meet out the requirement of gold during marriages of your loved ones. Even it is a good alternative for investment.


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