Wednesday, March 16, 2011


The Gold at present rules the monetary system of the world only indirectly. All the countries though depend on the deposit of gold in their vault to produce legal tender required by them yet pure gold standard is almost obsolete now.. The world has abandoned the gold standard in favour of so-called "paper money," and only a diminishing group on the far right continues to call for its return. However, if mainstream economists (on both the left and the right) have anything to say about it, there will never be a return to "that barbarous relic," as John Maynard Keynes called gold over 60 years ago. However, many countries buy and sale gold as the situation demands. India once sold out their Gold deposit to meet the monetary contingency and recently it did buy gold twice from Russia to strengthen its power to produce more legal tender. Though there are costlier commodities like diamond and platinum yet only Gold has become synonym with power. The Gold has reached this position of strength due to both practical and psychological value. Many people also relate with Gold better than any other commodities. If Gold is require by most nations, it is also favorites of vast number of Indian population

Now, the questions arises whether buying of Gold is a better personal investment strategy as the share market is not doing well for sometime now. On the contrary the gold prices have steadily gone up. Many investors have asked whether to buy Gold coins or Gold ETF... I always recommended individual citizens that for investment purpose the buying of GOLD ETF is better than buying solid Gold. It remains secure at least cost. But in case of marriage and life style enhancement, it is better to buy solid Gold.

Now, it is quite likely that most advisers do brief investors that gold prices never fall; it is an ultra safe investment. The countries around the world have positioned their currencies on Gold exchange parity by printing money, therefore gold will never fall in value, and by virtue of these operation gold ETF is risk free. But, you need to be aware that these are merely opinions.

It is surely a fact that Gold prices could continue to rise, or they can drop like a stone.Investors can make money, but they can lose money as well. However, most times investors would make money – of course with moderate gains. It cannot match the return of equity in long run. So individual investors can invest in Gold only about 10% to 15% of your total investment portfolio

How much profit should be expected from Gold over a period of five years? My wild guess is 10% to 18%.The history and statistics told us that in ten years equity and art form are the best investment followed by houses and Gold.

There are several gold ETF in our country. With the exception of Quantum – 1 unit of every gold ETF represents 1 gram of gold. If that’s the case then why does the price of these gold ETFs differ?

Gold ETF owns Gold, debt and other liquid instruments and cash. The combined value of these assets divided by the number of units in the gold ETF constitutes the NAV of the ETF. The NAV of gold ETF can be seen on its website, so you can see that the Benchmark gold ETF GOLDBEES had a NAV of 20000 in March 2011 .However, since an ETF trades in the stock exchange and there is a different price at every tick the price of the ETF can be different from its NAV. The NSE website shows that the last traded price on that day for GOLDBEES was Rs.20010/-

This means that the ETF was going at a discount of about Rs. 10 at that point. There are big market participants who are engaged in actively trading the ETF to bring the market price closer to the NAV and gain from any arbitrage opportunities available.

All ETFs have expenses that are paid out by selling gold holdings or using the income from their debt holdings, so although theoretically one unit of gold ETF represents a gram of gold – in reality the gold holdings are slightly lower due to the expenses. The higher the expenses, the lower would be the NAV, and consequently the trading price of the ETF.

A good example of this is the Reliance gold ETF which had a NAV of 1920.20 on 13th Feb 2011, and was trading at Rs. 1913 on that date.So, expenses eat into the NAV of the various ETFs, and affect their prices.

This question keeps popping up from time to time which is the best gold ETF in India. According to me right now the Gold BeeS ETF from Benchmark Funds has the lowest expense ratio of 1%. Quantum Funds comes second with 1.25%. All the other funds charge higher expenses. The lower the expenses – the better it is because it leaves more on the table for investors.

I found that – Gold BeeS, which has the lowest expenses, also has the highest volume, and by a large margin too. If I had to invest in a Gold ETF – it would be this. In case someone does not have d’mat account then he should buy Gold funds from HDFC, Reliance or UTI. He can also think of buying Gold Coins as well from banks. However, the bank don’t buy back Gold. Investors need to sale it to Jewelers at lower than market cost despite its great purity.

Continued international depression has made Gold a hero presently. But a time may come when countries may not be required to depend on GOLD for their monetary policies a new commodity may take its place in future. What would be that product is not known to anyone yet. So the gold bugs would have to resolve historical and theoretical challenges of King-Midas proportions before they could ever reinstate the gold standard. But if a workable gold standard requires a tremendous amount of design, effort, regulation and safeguards, we might as well use fiat money, which is already simple and enjoys a successful track record.

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