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Are Gold Funds too losing their Glitter?

Gold ETFs, after shining bright for the past 6 months, lost their glitter & turned in negative returns in July

The picture is certainly very bleak. First we had the equity funds turn in negative returns month after month. But gold, as an asset class, rose to the rescue by delivering great returns.

Looks like that phase too has come to an end, at least for a while. After delivering handsomely in the first half of this year, gold funds — those that invest in mining companies and gold Exchange Traded Funds (ETFs) have succumbed to the bears.

The two gold funds, DSPML World Gold Fund and AIG World Gold Fund, invest in the stocks of companies, which are involved in extraction and marketing of precious metals (primarily gold). The prices of these stocks went overboard when everybody started betting on gold as ‘the alternative asset’. But as soon as the prices of crude began to ease off and the dollar stabilized a bit, gold prices started to fall. This meant that the companies which were supposed to be the prime beneficiaries of the run up in gold no longer looked that lucrative. Consequently, the stock prices of these companies commenced their southward journey dragging the performance of the funds. Both the gold funds were down by 12 and 13 per cent respectively, for the month of July, 2008.

Gold ETFs were the darlings of investors in the first half of the year. Since January-July 2008, these funds have comprehensively beaten equity funds by delivering 52 per cent more by way of return. Even in comparison to gold funds, gold ETFs have delivered a 16 per cent extra return.

But by July, gold funds were showing signs of fatigue. None of the gold ETFs have given any positive returns in July. And the category as a whole landed in the red with a negative return of (-)3.32 per cent.

Everything seems to point to the fact that the gold is losing it’s glitter. Fundamental demand and supply factors indicate that India, the largest market for gold, is fast losing its appetite for the commodity due to its sky high prices. Moreover, other factors like falling crude oil prices and the appreciating dollar is also taking a toll on the gold prices. So investors chasing performance could take note of this. But no one knows for sure how the price of gold will move over the long term. It all depends on the price of crude and the direction the dollar takes.