MyValueResearch

Gold ETF- An attractive avenue of investment

India is a country where people worship gold as God in the investment avenues. The total gold market in India is somewhere around Rs.70,000 crore, of which, Rs.20,000 crore is in the investment market. India is the world’s largest market for gold. How aggressively Indian people are investing their money in gold is revealed by the fact that the consumption of gold in India rose over 70% to 528 tonne in the first half of the current year from 307 tonne in the corresponding period last year. The consumption was a little over 700 tonne in 2006.
Year 2007 may be called as “Gold ETF year” in the history of India.  After witnessing massive positive response in the international market, now Indian players have entered actively in this new concept of investment. As of today, Benchmark, UTI and Kotak Mutual Fund have gold ETFs. In the month of February 2007, the first gold ETF was launched by the Benchmark mutual fund named “Benchmark Gold Exchange Traded Fund” and then UTI and Kotak Asset Management companies (AMCs) also launched their gold ETFs in the March and June respectively. Fund houses such as HDFC Mutual Fund and Quantum are waiting to launch their own ETFs, while Reliance launched its gold ETF recently on 15th Oct. This new and attractive investment avenue in India is getting tremendous response from the investors. It is revealed by the fact that Gold ETFs has registered a sharp rise of 7 percent in September in its unit market prices. Benchmark’s Gold ETF has given returns of 6.94 per cent in September. The other two - UTI and Kotak mutual fund - have also given returns of 6.96 and 6.97 per cent respectively. These three ETFs account for a total AUM of Rs.324.77 crore, according to the AMFI data for September. Three gold ETFs are already active in India, with gold prices touching an all-time high Gold ETFs have once again started giving better returns.
Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion. The investor’s holding will be denoted in units, which will be listed on a stock exchange. These are passively managed funds and are designed to provide returns that would closely track the returns from physical gold in the spot market. An investor can buy and redeem the units either directly from the mutual fund, subject to certain stipulations, or from the stock exchange.  Gold units are apparently intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold. This introduction of Gold shares is supposed to lower many of the barriers, such as access, custody, and transaction costs, that have prevented some investors from investing in gold.
Gold ETF has already become very popular in other countries like Australia, the United Kingdom, South Africa, the US, France, Mexico, Switzerland, Turkey and Singapore and now in India too.
Advantages of Gold ETFsThere are different ways to invest in the gold like physical gold (buying of gold bars, gold coins) or an investor can purchase a Gold ETF or through MCX but Gold ETF is the best way to invest in gold. Because if an investor purchase gold ETF instead of physical gold, Ø First he will get the gold ETF units at a fair price but while purchasing it in physical form the price may be manipulative. Ø Second, there is not any chance of impurity risk, which is possible while purchasing physical gold. Ø Third, the risk of theft is not possible in Gold ETF and there is no problem for warehousing too, due to in the dematerialised form. Ø Last, the investment amount involved in the gold ETF is low but while purchasing physical gold one need huge investment amount. Parameters Bank/ Jewelers Gold ETF
Purchase Physical Form Dematerialized
Pricing May be Manipulative Transparent
Making Charges Involved Not Involved
Impurity Risk May be None
Risk Of Theft Yes No
Wealth Tax Yes No
LTCG* Yes but after 3 Yrs Yes after 1 Year
Investment Amount Huge Low

Why one should invest in Gold ETFs
· Plummeting US Dollar
The Greenback is trading at the historically lower level against the Euro due to major slow down in US economy. Flaming crude oil prices, which are at multi year high, are also pressurizing dollar to see the further decline. Hence, both of these factors are supporting gold prices. Furthermore, decision of fed rate cut by the federal reserve of US has already sent dollar at the bottom, which ultimately gave much awaited strength to gold.  Magical movements in gold have attracted the attention of investors. As a result, people have started to park their money in ETFs’ also.
There is a negative correlation between US currency and the gold prices, when the dollar weakens on the foreign exchange market over an extended period then the US$ gold price will generally rise during the same period; and when the dollar strengthens over many months the US$ gold price will usually fall. 
Dollar weakness and safe-haven buying amid unstable equities and an ailing US economy sent the precious metal to new 27-year highs last week.
· Supply Constraints
Despite the significant increase in the gold price since 2000 and the bullish demand scenario, world gold supply has remained static, as the sale of gold by central banks has been falling. Net official sector or central bank sales in the first six months of 2006 are down 60% year-on- year and full-year total net sales are forecasted to dip below 400 tonnes. Mine production in the first half of 2006 fell by 1.5% year-on-year to 1,168 tonnes. So, gold supply is forecasted to remain static or increase only very modestly but demand is set to continue rising which will lead to rise in the price of gold and it will add to the returns of gold ETFs.
· Rising crude oil prices:
There’s always been a strong relationship between crude oil and gold. Oil price is an important driver of the gold price. Currently, crude oil prices are running on the high time high, it has crossed $90 per barren. There is a positive correlation between the crude oil prices and the prices of gold. An increasing oil price results in increasing inflation, negatively impacting the global economy, particularly oil-dependent economies such as the US. Apart from increased transportation, heating and utility costs, higher oil prices are eventually reflected in virtually every finished product, as well as food and commodities in general. Furthermore, there is evidence that global oil production is peaking and the flow will soon be in permanent decline. Gold moves up in tandem with inflation. In other words, gold is a natural hedge against rising inflation. It is known fact that gold prices hit the roof during the second oil shock in the late seventies and in the current situations too.
· Increasing investment and jewellery demand:
The US, which accounts for 10 % of world gold demand, is also one of the markets where public taste in gold jewelry is enjoying a renaissance. The renewed interest in gold also extends to Japan, a market that showed a 19% increase in demand. The Indian market – the world’s largest for gold demand is also higher following the marriage and festival period. The Indian wedding season runs from December to May and with about eight million marriages each year, typically generates a noticeable spike in global gold demand.