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Gold ETFs Top on Gains

The price of gold is at an all-time high and gold ETF investors are eyeing returns

Gold prices are at their all-time highs and expectations are that they will end up beating the old mark by a handsome margin, which spells good news for gold ETF investors too.

The precious metal achieved its all-time high on Monday at Rs 15,740 per 10 grammes and on Tuesday it did even better by scaling yet another peak at Rs 16,200. The likelihood of a further jump is being bandied about as the latent demand for the commodity is still large and history shows that gold prices start rising in this period every year. The prospect in India too is of growing demand even though in normal times, it dries up at the onset of ‘Shraadh’ fortnight, but this time, traders are buying even during this ‘inauspicious’ period signifying that they are expecting a lot of orders that would empty their inventories soon.

The reason behind this is not too hard to find. On the domestic front, upcoming festivities-cum-wedding season is pushing demand, despite the high price, while on the international arena, it is being lent wings by the weak US dollar, global expectation of inflation resulting from the presence of extreme amounts of liquidity in most large economies.

In addition, with stock market investors seeking to play safe or avoid volatility (markets have been range-bound for more than a month, but they have broken newer heights in the past few days), they are transferring their money from stocks to gold.

Seeing such huge spurts in prices is nothing new for India though, as it accounts for almost a quarter of global sales in the commodity as its biggest consumer and the demand is quite inelastic.

With the demand likely to remain robust, therefore, the all-time high that the metal is likely to reach, according to most traders, is Rs 17,000 this time around. The timing that is being bandied about is somewhere between the end of the month and the beginning of October.

Performance Paradigm

While that is the realm of conjecture, for the purpose of this story, we are going by the solid numbers that have already been chalked up by the precious metal and apply it to the gains that have been registered by gold exchange traded funds (ETFs).

The performance of these ETFs are as scintillating as that of the current purple patch that the metal is going through. And gold ETFs have been the best-performing mutual fund category both in the 1-year and 2-year time frame for quite some time.

There are six gold funds in all, and all of them are generating a returns in excess of 30 per cent (see table). Their assets in August 2009 were 4 times of the assets in April 2007, signalling their increasing rise to popularity after a very slow start when the instrument was first revealed in 2007.

However, those looking for a positive performance from gold ETFs during the recent bull run would be disappointed. From March 9, 2009 to August 3, 2009, when the rally started and the point at which Sensex closed at its highest point, gold has been a non-performer, emerging with just -5.37 per cent gains. At the same time, Sensex returned 95.14 per cent, while Banking funds category returned 104 per cent, Diversified equity funds returned 87.98 per cent, FMCG funds returned 58.84 per cent.However, over a longer period of time, the returns generated are more likely to be comparable.

Up to August 31, 2009, returns for gold ETFs this year has been 10.86 per cent, while the Banking funds returned 49.30 per cent, diversified equity funds returned 61.66 per cent, FMCG funds returned 42.89 per cent.

However, when we check the data for one year up to September 4, 2009, we can actually see the tangible gains chalked up by gold ETFs category at 33.02 per cent. Banking funds gained 12.42 per cent, diversified equity funds gained 8.17 per cent, and FMCG funds gained 16.69 per cent.

Over the 2-year period, gold ETFs returns are 31.20 per cent, Banking funds’ are 0.47 per cent, while Diversified equity funds’ are 0.31 per cent, and FMCG funds’ are 7.47 per cent.

Path To Investing

Such kind of returns will definitely make any investor’s mouth water at the prospects of generating relatively risk-free returns.

Those inclined to take the next step to actually buy into the commodity will face some choices. There are three ways to enter the commodity through mutual funds. One of them is gold ETFs mentioned above, while the other is to buy into gold equity funds – two exist at the moment in India - AIG World Gold Fund and DSP BlackRock World Gold Fund – through them investors will be buying the stock/equity of global gold mining companies.

Last year, a combination product that invests in equity, debt and gold, was revealed thereby adding a third option on the mutual fund universe for investors in the form of UTI Wealth Builder Fund-Series II.

AIG World Gold is the fund that has given excellent returns in its short history which stands at 41.36 per cent in 1-year time frame. This fund was launched in May, 2008 sometime before the world market’s crashed and investor’s had flocked to gold to hedge their risk from the crash.

The other specialty fund available is DSPBR which was launched in August, 2007, but its performance is not as good as the ETFs, although at 29.50 per cent it is nothing to sneeze at.

Modern Machinations

Having said that, the character of gold has moved away from the physical held asset to a paper asset and that makes it as prone to volatility as stocks, thereby diluting its risk-reducing advantages. As such there were times that gold has fallen in excess of 25 per cent in the middle of 2008, when stocks too were tumbling all around. The truth really hit hard when gold fell to an extreme low in October 2008, exactly when the stock markets were hit the hardest. As such, the price of gold is being increasingly determined by the demand and supply of the commodity in financial markets. And yes, gold may well create a bubble as stocks or realty did last year, so beware.


A Golden Sheen
Category    Returns
     1 Year    2 Years    3 Years    YTD
Gold ETF   33.02   31.20   N/A   15.06
Equity Funds                
Equity: FMCG   16.69   7.47   7.55   43.33
Equity: Banking   12.42   0.47   22.75   49.47
Equity: Pharma   10.26   5.44   6.46   51.32
Equity: Speciality   8.27   -0.82   11.55   45.70
Equity: Diversified   8.17   -0.31   9.75   61.45
Equity: Index   7.09   0.28   9.16   55.54
Equity: Tax Planning   6.55   -0.80   9.12   59.04
Equity: Technology   2.12   -8.89   3.36   82.33
Income Funds                
Gilt: Medium & Long-term   10.98   9.04   7.83   -8.51
Debt: Short-term   10.74   9.29   8.85   4.52
Debt: Medium-term   9.93   7.86   7.31   -0.79
Debt: Liquid Plus   6.97   7.88   7.67   4.01
Debt: Ultra Short-term   6.07   7.12   7.16   3.37
Gilt: Short-term   5.87   6.00   6.06   -0.29
N/A: Not Applicable; All returns as on September 4, 2009.