Investment opportunity in the current market through Gold ETF

Indians love gold and hold the distinction of being the largest consumers of gold in the world. The perspective of gold is soon changing from an item of consumption to an investment vehicle with the advent of the Gold Exchange Traded Funds (GETFs). GETFs have made investing in the yellow metal as easy as buying stocks. With GETFs, one can trade in gold without taking physical delivery or compromising on the quality.

However, with the recent fall in gold prices, GETFs have lost their shine to some extent, in terms of returns, but the good news is that the demand for gold ETFs has been increasing.

The factors responsible for the fluctuations in gold prices is given as under with a recap on gold funds,
An Exchange Traded Fund (ETF) is one, which can be traded on the stock exchanges. Through a gold exchange traded fund, one can buy and sell units of the gold ETF on a recognized exchange. Gold ETF is a mutual fund scheme that allows one to trade in gold. The underlying asset for the units of a GETF is gold, where, each unit represents a definite quantity of pure gold (approximately one gram) and the price of which moves in tandem with the price of the actual gold metal in the bullion market. The product is designed to give returns that closely correspond to the returns provided by physical gold. Two GETFs have already been launched and a few more are waiting in the wings.

Currency fluctuations could lead to gold prices moving up or down. In fact, gold is considered as an excellent hedge against currency fluctuations. All currencies are subject to risks such as economic and political among others. Investment in gold is one of the ways of hedging these risks.

Gold ETFs closely track the price of gold, any change in the latter will have a corresponding effect on gold funds. During the last one month ending on June 15, 2007, Benchmark Gold Exchange Traded Fund and UTI Gold Exchange Traded Fund have delivered negative average returns of approximately 7.33 and 7.90 per cent respectively.

The gold ETF is giving negative returns since inception because domestic gold prices have gone down since then. Even though the US dollar price of gold has been more or less the same, the rupee price of gold has fallen due to rupee appreciation against the dollar.

For example, on a particular date, if one US dollar is equal to Rs 45, gold trading at $600 per ounce will cost Rs 27,000 ($600* Rs 45). If after six months, one dollar is equal to Rs 40 (which means that the rupee has appreciated vis-à-vis the dollar) and assuming gold is trading at the same price of $ 600 per ounce, the same quantity will cost Rs 3,000 less (Rs 27,000 – ($600* Rs 40 = Rs 24,000)). This means that appreciation in the rupee against the dollar has made gold cheaper.

However, the fall in gold prices has been positive for GETFs, as the traded volume has jumped five fold in the last one month alone. The total volume of trades in GETFs, as per the data available with the National Stock Exchange (NSE), has surged from an average of around 2,500 units traded to around 12,000 units in May 2007.

Industry analysts perceive that gold prices are set to appreciate by 7-9 per cent by the end of the fiscal year. The outlook of the World Gold Council (WGC) too looks positive, with overall prospects for investing in the yellow metal being affirmative, with a number of underlying political and economic factors well aligned and an increasing number of gold investment vehicles available.