Gold ETFs a good bet, but time it well!

February 05, 2009

Commodity Online
NEW DELHI: With gold resisting recession and posting huge gains, investors are seriously looking at gold exchange traded funds (ETFs) as an investment option.

But, putting your money in gold ETFs is a risky affair where if you don’t play your cards well you may not benefit from your decision.

Gold ETFs in January posted a one-year gain of 18.5 per cent, which is almost similar to the one-year return of about 18.7 per cent in Indian gold prices in rupee.

If you want to get some good returns from ETFs you have to time your investment very well.

If you check the data available for the past one year, returns have been as high as 13 per cent over two months for investors who timed their entry really well and invested in gold ETFs on December 5, when global gold prices bounced off their recent low in India while global prices were around $749 per ounce).

But, if you had bought your ETFs in the peak time at $1,100 per ounce in international market and at the record high in India markets during March 2008, then your earnings will be as low as 3 per cent.

Those who made money from gold ETFs in the past few months also should thank rupee. Because of rupee’s steady depreciation helped investors gain handsomely from gold ETFs. Over the past year, international gold prices have headed nowhere and are actually down by about 3 per cent. But the gains came from the rupee fall.

In India gold prices rose roughly 18 per cent the past year. Going forward, therefore, returns for Gold ETF investors will depend not only how global gold prices fare, but also on the direction of the rupee against the dollar.

Apart from Gold ETFs, Indian investors looking for gold-related investments have the option of global gold equity funds, which invest in the stocks of gold mining companies.

However, these funds, having been battered last year, have staged a sharp rebound since early December. Both DSP BlackRock World Gold Fund and AIG World Gold Fund have delivered a 35 per cent return from early December, tracking the simultaneous recovery in equity markets as well as gold prices.

As commodities and stocks fell in tandem, gold mining stocks were battered by investors, even as gold, in the commodity markets, held up fairly well as safe-haven demand continued to flow in.

However, gold mining stocks have staged a recovery since December as a more favourable environment emerged for equity markets in general, even as gold prices too climbed.

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