Posts Tagged ‘commodity futures markets’

Gold ETFs………..Safe Haven Against Market Risk

Not too long ago, when buying physical gold was the only option for investing in gold. However, the launch of Gold ETFs has opened another option for investors. When the stock markets take a sharp fall investors to look beyond equities and consider other investment avenues. In that case gold provide safe heaven. By enabling investors to invest in gold without holding it in physical form, it offer a rather unique investment opportunity to investors.

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Gold ETFs are commodity exchange traded funds which track prices of gold. Hence, they can be bought and sold like stocks on a real-time basis. These funds are passively managed and they mirror domestic gold prices.

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How Gold ETFs Work

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Gold ETFs are essentially different to gold. The manner in which they track the gold prices makes gold ETF products unique. Some gold ETFs buy and physically hold gold while others invest in futures contracts. Physically-backed gold ETFs will obviously track the spot price of gold more accurately, since the value of the underlying holdings depends solely on the market price of bullion.

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ETFs that using futures contracts will track the spot price of bullion very closely, but may deviate occasionally due to phenomenon’s such as backwardation and contango in commodity futures markets.

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For investors with significant gold holdings, diversification across custodians and geographies may be desired as well. Some investors may sleep better at night knowing their gold is securely stored in multiple locations in different parts of the world. For this reason, London-based ETF Securities offers an ETF that stores its gold in Switzerland, a country long known for being friendly to investors due to different reasons.

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The holding of world largest gold ETF SPDR Gold Trust, rose to 1295.516 metric tons by August 18.

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Correlation with dollar

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Gold generally traded inversely with dollar. Gold tends to rise when the dollar is weak However gold traded positive co-relation with dollar recently. It can be seen as uncertainty in global recovery which has supported both gold and dollar index.

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Criteria for selecting a Gold ETF

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Ideally, investors must select a Gold ETF that holds a significant portion of its portfolio in gold and a fund which has a lower expense ratio. Higher expenses translate into lower returns for investors.

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Advantages of Gold ETFs

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? Gold ETFs can be bought at the prevailing market rate without paying any premium

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•Quick and convenient dealing through demat account.

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•No storage and security issue for investors

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• Transparent pricing

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• Can be traded on stock exchange like buying / selling a stock.

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• Ideal for retail investor as minimum lot size to trade is one unit on secondary market. The resale value will be always safe

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•NAV of a unit will track price of approximately ½ or 1 gram of gold

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• As per SEBI regulations, the purity of underlying gold in Gold ETFs is 0.995 fineness and above.

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•long-term capital gains tax is applicable after twelve months from the date of purchase

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•Gold ETFs are not subject to Wealth Tax.

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Gold ETFs turnover in domestic market The table shows the Gold ETFs available in India and there turnover. Among 7 Gold ETFs GOLD BEES accounted for 60.30 % of the total trading volumes during the month July. Since July 2009 monthly turnover is increasing rapidly due to growing uncertainty in global recovery.



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