Gold Exchange Traded Funds
Investing in gold is a great way to secure your investments and hedge them to survive the fallout of a turbulent economy. But not everything about gold bullion glistens. Gold is heavy, it is hard to transport, it will set off a metal detector. Selling gold often means the buyers inspecting the gold in person, testing for purity, and weighing each and every piece. Some countries require you report any gold purchases over a certain amount, and still others prohibit owning gold at all! But it’s not just the inconvenience of owning and selling gold, it’s also dangerous to keep around. Gold is attractive, and if various unscrupulous parties find out that you are storing gold bullion in your house, your life could become an awful lot like a spy thriller movie real fast. Minus the expensive cars, super model scientists, and cool gadgets.
A gold Exchange Traded Fund (ETF) is a financial instrument like a mutual fund whose value depends on the price of gold. In most cases, the price of one unit of a gold ETF approximately reflects the price of 1 gram of gold. As the price of gold rises, the price of the ETF is also expected to rise by the same amount. Similarly, a fall in the price of gold will also be reflected by a drop in the price of the ETF.
Gold ETFs provided investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.
The idea of a gold ETF was first officially conceptualised by Benchmark Asset Management Company Private Ltd in India when they filed a proposal with the SEBI in May 2002. However it did not receive regulatory approval and was only launched later in March 2007. The first gold exchange-traded fund actually launched was in March 2003 on the Australian Stock Exchange under Gold Bullion Securities (ticker symbol “GOLD”). Gold Bullion Securities (GBS) are fully backed by gold which is both deposited and insured. GBS was launched to give financial institutions and private investors the ability to own gold and gain exposure to the price, without the inconvenience of storing physical bars or opening a futures trading account.
Gold Market Overview
Gold prices breached USD 1000/Oz * during the first half of September, 2009 mainly on back of weakening dollar outlook and higher inflation expectation. The talks of “Vulnerabilities and Systemic Risks” in current monetary systems are gaining grounds. United Nation has expressed concern over US dollar as the world reserve currency, in line with the view expressed be few others. No doubt the case for new reserve system is strong but lack of strong alternative currency does not make it a pragmatic option in near future. Such a situation is taking a toll on US dollar and that benefits gold as gold is seen as back bone of robust monetary system by many.
Due to these inconveniences, many bankers and brokers will advise you to invest in gold in an easier way. Gold exchange traded funds are one of those easier means. Commonly called a Gold ETF or GETF, gold exchange traded funds can be bought easily online through a brokerage account. Funds like GLD and others allow you to buy this “almost gold” and keep it in your brokerage account as it if were a stock, which legally speaking- it is stock. Because of this gold exchange traded funds are often called the Gold Stock Market. You are not actually buying physical gold bullion here, no matter how much your banker wants you to believe it. With an ETF you are buying stocks in a company that invests in gold. The EFT’s track the quoted spot gold price.