Investing in gold or other precious metals is very popular these days, but purchasing these requires special attention. Gold exchange-traded funds (ETFs) provide a method for investing in gold that eliminates issues relating to purity, insurance, storage and reselling.
What does ETF mean?
An ETF is an exchange-traded fund that is traded on the major stock or commodity exchanges. It works like this: The gold ETF will purchase a large amount of gold, maintaining the physical metal in storage. It will, then, issue units in baskets, the idea here being that the value of the units will increase with the price of gold.
If the price of gold goes up by 10%, the value of the units issued would also increase close to 10%. Slight differences in returns are caused by expenses charged by the funds and some cash held for transactional purposes ? this is known as tracking error in investment parlance.
What makes gold ETFs attractive?
Trading in gold can be done very easily at any time during stock market hours with the help of your broker or using your brokerage account. Another advantage is that one does not have to buy a large amount of gold to invest.
Most gold ETFs have a minimum investment threshold as low as R1,000, which makes it really ideal for investors since the price of gold these days makes it something not everyone can afford to purchase. Moreover, in gold ETFs one does not need to worry about storage, theft, certification and reselling.
Gold as an investment
It is statistically proven that gold is a hedge to uncertainty and inflation. We have seen this especially in the last 10 years, where gold prices have moved sharply every time there has been an economic downturn or high inflation. This is due to the fact that gold is bought by central banks and individuals as an alternative currency. It can test one?s patience sometimes. Let me explain. Gold prices did not move in India for almost seven years (from 1994 to 2001). If at that time, one were to lose patience and stop investing in gold, one would lose a potential gain of 700% in the next 10 years (2001-2011). Just to emphasise this point, the prices of spot gold did not move for 20 years in the US (from 1984 to 2003) and remained at the same level.
How to invest
Direct method. A potential investor can open a demat account along with a brokerage account with any trusted broker. He can then start purchasing gold ETF units after paying the desired margins.
Indirect method. There are a lot of mutual funds that invest in gold along with other asset classes of debt and equity to attain a balanced asset allocation strategy. Hence, any potential investor can look at that route to take indirect exposure to gold ETF. This is relevant for those who do not have a demat or brokerage account.
While gold has appreciated significantly over the last 10 years and especially in the last four years, it is expected that the price of the metal will continue to steadily rise if the global economic uncertainty persists. However, if there is a semblance of a resolution of this crisis, there is a fair chance of correction in prices. This would be an outcome of offloading of speculative positions.
n The writer is managing director and chief executive officer of Peerless Mutual Fund
