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Thursday, September 24, 2009

Whether buying of gold makes sense now?

During last few months I am flooded with a question from our readers whether should they buy Gold or Gold ETF. I am really surprised to find that so many persons have been rushing to buy Gold now a days. Gold have been favourite of human being from time immemorial. In fact Indian buys and holds maximum quantity of gold. Indian uses gold in ornaments during the wedding. Fashionable persons were gold jeweleries to make style statement. Yet most of the people uses it as the security for life during the financial crisis.
The birth of GOLD ETF emerged out of this sense of secuirty for life. The orld monetary system revolves round the GOLD standard. Nobdoy knows actually how many tons of Gold are kept in the FORTKNOX of USA but i the belief that works out like miracle. Entire monetary system revolve around the Gold. Recently IMF had recommended that countries of the world can sell Gold to combate recession. It is expected that GOLD price may come down when actual sell of Gold takes place. But according to some economist in the next fifteen years the value of Gold would go up many fold. In that pre supposition value of Gold is going up slowly from now onwards. So whether people should buy Gold or GOLD ETF ?

According to me if someone wants to make jeweleary for ewedding then it would be prudent to buy Gold. But it people wants to make an investment out of Gold then it is better to buy Gold ETF. What is GOLD ETF? Who started it? Is is worth while to buy ETF rather the Gold Metal? These are the questions need to be answaeered now.


Exchange traded funds (ETFs)were first introduced on the Toronto, Canada, Stock Exchange around the early '90s. They were then introduced in to the US and other markets during the 90s. in India Gold ETF was started during Twentyfirst century. What is the meaning of GOLD ETF fund?


A simplified definition would be: An exchange traded fund has funds and stocks in one product and trade is made on the particular fund. Prior to ETFs, stocks and funds, were traditionally kept separate to reflect liquidity issues.

The purpose of an ETF is to be able to invest in the growth of an industry or even commodity that was not easily available to the market prior to ETFs.There are certain inherant benefit of ETF. Those are:flexibility in the timing of purchases and sales. No taxes involves in ETF if investment is held for more than a year. However there are cetain disadvantage that there is no control of thebuyers of ETF over the activities or the content of the ETF. There is no gurantee that ETF buyer would own real Gold metal.The i9nvestor cannot redeem gold or take delivery of the gold. They can ofcourse get Cash equivalent to value of market based gold. To buy ETF there is hidden cost broker but that is minimal . It is even lowers than MFund cost. The unit reflect the price of actual price of London Bullion market. The greatst advantage is ETF is safe and there no problem of storage and cannot be sold any day when market is open.Once you have a brokerage account you can buy Gold ETF by placing an order like a normal stock order to buy listed Gold ETF. Most of the ETF are listed only on NSE. Unfortunately, BSE does not have any Gold ETF listed on it.

Gold EFT are fast becoming a rage in India. One reason attributed to its popularity could be its stellar performance in a relatively subdued market conditions.


It is a wise decision to allocate just a small portion of your portfolio to gold ETFs. Gold ETFs should not be looked at as a mainstream investment. Currently, there are six gold ETFs operating in the market and they are all alike. They are structured in a way that all generate same return. The NAV of all funds should be similar as per the market price of the gold metal .All ETF funds charge one percent expense. So any Gold ETF is virtually cost same and returns are also same.

When first introduced in India, many were skeptical about its relevance and suitability in Indian markets, however increasing volumes and new scheme launches(Quantum, SBI) indicate its growing acceptance in a naive market like India. It is a complex financial instrument. It involves many different entities apart from usual fund managers who manage the scheme. However, its has its own limitations since it is listed on exchanges.

Many people are unaware of ways to buy a GOLD ETF.

You need a Demat account along with broker who is a member of NSE to buy a Gold ETF. How much investment a persons should make in Gold or Gold ETF?


Any investopr should not invest al their disposable income in one basket. The money to be invested should be distributed. A persons of forty years age as the thumb rule goes should invest 60% in equity 20% in Gold ETF and 20% in Debt fund or FD( including PPF and bank saving acount). Investors some time make mistake of high investment in Gold ETF as they find when Dollar value goes down Gold Value goes up. But experience says nothing provide better return in long run than (1) work of art,(2) equity,(3) house and then only(4) Gold or Gold ETF. The investor should have gold ETF in their folio but not in preference to equity,and housing . The Gold ETF is good for creation of Wealth butnot for running their family expenses.


To hedge against Financial Collapse buying physical Gold is good if you have secured place to store.In a situation of great financial crisis GOLD ETF and share of Gold mining comapnies would never help . What should be done now?
Buy Gold or Gold ETF on DIP( not share of manufacturing comoanies) and keep it for for long term. But beaware gold should be a minor part of your portfolio and not the whole of your portfolio.

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