Tuesday, March 9, 2010

Are you thinking of buying gold ETFs or a gold fund?

Four weeks back, I had raised the question: Is this a good time to buy gold? Guess I should have been a little more specific. I meant gold ETFs (or a gold fund) - not physical gold.

Buying physical gold has lots of associated hassles. How much should you buy? Coins, or biscuits, or bars? Where will you store them? Bank locker? Under the concrete floor of your basement?

Who will you buy it from? Your trusted jeweller? A Tanishq store? From a bank? How can you ensure purity? What if you want to resell some of it to raise liquidity? How will you go about it? How quickly can you complete the transaction?

Too many questions - which has prevented me from ever buying physical gold. But with the advent of gold ETFs and gold funds, almost all hurdles to 'buying gold' can be easily overcome.

Now comes another set of questions. Which gold ETF or gold fund to buy? How stable is the asset management company? What will be the returns like?

For the uninitiated, an ETF is like a mutual fund unit that can be traded in a stock exchange like an equity share. The NAV of each unit of a gold ETF approximately corresponds to the price of 1 gram of physical gold. So all gold ETFs give the same returns.

Now it is your choice whether you want to buy the ETFs from Benchmark (with the largest AUM) or SBI (the smallest) or from any one of the other handful of fund houses.

There are also gold funds that invest in gold mining companies and fund of funds (FoF) that invest in gold ETFs as well as in money market instruments, corporate debt and units of debt and liquid funds.

In the past one year, gold ETFs have returned about 5.5% - better than many debt funds, but a pale shadow when compared to more than 100% returns for the Sensex. The scene was different a year back, when gold ETFs were returning greater than 20% while the Sensex was in the red.

As I mentioned in my earlier post, allocate only a small portion of your portfolio to gold ETFs. Now a quick look at the 1 year gold chart pattern:-


After correcting from a high of USD 1212 in Nov '09 down to 1050 in Feb '10, gold prices started rising again and formed a bullish inverse head-and-shoulders pattern with the right shoulder getting support from the 14 day SMA.

The neckline at around 1140 was pierced from below, after which a pull back down to the neckline is in progress. The price chart pattern is likely to take support once again from the 14 day SMA which is almost at the same level as the neckline at 1140.

Till the previous peaks at 1150 and 1212 are not conquered, the bears will remain in the game, even though they seem to be losing ground rapidly. The 200 SMA continues its steady climb, so bulls have little to fear.


Jasi said...

Nicely put and summed up there Sir!
Another school of thought ... gold can and is usually also seen as a safety avenue in case of emergencies like economic breakdown and currency crisis.
That said, ETFs have been a godsend for individual investors!

Subhankar said...

Quite right, Jasi.

Those who invested in gold ETFs during the bear market carnage of 2008 reaped decent returns.

Alkesh said...

We are in age of 21st century...
Age of earth quakes & nuclear bombs.

If you buying something for safety in case of emergencies, buy physical gold.

We donot have a big emergencies yet so donot know how Gold ETF deals with that.

but 100% better then stocks

Subhankar said...

Physical gold can disappear if the earth cracks open and vapourise in a nuclear explosion. But an ETF will forever remain as an entry in cyberspace!!

100% better than stocks? Definitely not in investor returns.