Weak dollar adds shine to gold ETFs than metal

Oct. 8, 2009 - PRLog -- Gold exchange traded funds (ETFs) have performed better than the spot gold in the last two months due largely to better returns from other investments and the rupee strengthening against the dollar.

The gold ETFs listed on stock exchanges have given an average return of seven per cent between July 22 and September 22, while the spot gold has risen by five per cent in the same period.

Mr Harish Gallipalli, Vice-President, JRG Wealth Management, said gold ETFs have the leeway to invest up to 10 per cent of the total asset under management in debt and money market and this delivered better returns to investors.

The corporate debt market has performed much better the last few months with appetite for debt among large corporate houses improving significantly, he added.

Since the dollar has remained weak against rupee, spot gold prices in India have not gained as much as they had in the international market. As gold ETFs benchmark the net asset value on international markets they have managed to perform better than Indian spot gold, said Mr Sashi Agarwal, an independent gold analyst.
Lack of awareness

Even after performing better than the spot gold, lack of liquidity in gold ETFs remains the major concern for investors.

Mr Rajan Mehta, Executive Director, Benchmark Asset Management Company, said lack of awareness among common investors has suppressed the growth in liquidity.

Besides, he added, large institutional investors and hedge funds that drive gold ETFs globally are not the major participants in the Indian markets. “Institutional investors and hedge funds cover their dollar exposure by investing in gold ETFs,” he said.
New funds

The expected launch of new ETFs may also not help increase liquidity.

“The new ETFs are not going to do anything different. They may attract a few investors during the new fund offer period, but ultimately the long-term performance of the scheme will give investors the confidence,” said Mr Mehta.

Arguing that the one per cent charges levied by gold ETFs are much lower, Mr Mehta said there is a premium of 10-15 per cent if one buys gold in the form of coins. The cost compares favourably for ETFs even against the jewellers who levy making and wastage charges.

With the dollar weakening against major global currencies, gold prices are expected to gain further ground. “There are very few investors who are lining up to sell their old gold ornaments, unlike when it crossed the Rs 15,000 (per 10 gram)-mark,” said Mr Vikram Jain, a Mumbai-based bullion trader.

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BAMC is an asset management company in India with a primary focus on indexing and using quantitative techniques in creating innovative products. Benchmark is run by professionals with a long experience in the Indian and International Financial Markets.
www.benchmarkfunds.com