Aman Dhall & Dheeraj Tiwari (c)The Economic Times
4 Nov, 2007
The glitter of gold may not be the same this festive season with prices of the precious metal reaching an all time high. But amidst this volatility in the international markets, the latest option of investment in gold through futures and exchange traded funds (ETFs) is wooing a new set of investors. Here’s an insight into why you should prefer investment in futures and ETFs over gold.
Shining Instruments
So how does the mechanism of ETFs works? For starters, these funds are traded on stock exhange much the same as a regular stock does. “ETFs are essentially passively managed funds. If you buy a Gold ETF there is no real fund management involved and your invested money is simply used to buy the underlying commodity,” explains Jayant Manglik, head, commodity business, Religare Commodities, a Ranbaxy promoter group company.
Compared to buying the physical commodity, ETFs allow you to buy ‘units’. So you can invest in small amounts. There is also no entry load (except the brokerage) and zero or minimal fund management charges because it’s a passively managed fund. “Expense ratios are typically lesser. Eventually, investors in India too will benefit once the liquidity improves and more people take to ETFs. Besides, no one is ‘pushing’ the price,” says Manglik.
Precious Metal
Demat delivery (just like in equity) does away with the requirement of keeping the commodity in physical form, thereby making security a non-issue. Compared to the sharp increases in the prices of precious metals in previous years, the cost of demat is minimal.
Experts believe that futures have several advantages over ETFs in terms of leveraged positions and small margins, which effectively allows the investor to ‘buy’ the same amount of gold at a lesser ‘price’. “Rather than being a passive investor, it is better to buy through futures that allow you to take benefits of a fall in market prices as against ETFs, which are ‘long-only’ funds,” feels Shyamal Gupta, head, institutional Business at Kotak Commodity.
Delivery Route
Industry players believe taking delivery through futures is beneficial for people who want to buy to meet social compulsions. “One big advantage is that only the best hallmarked gold bars in the country are given as delivery by the exchanges like MCX and NCDEX and so purity is guaranteed,” says Manglik. But taking demat delivery has its own disadvantages. When the price goes against your position (price falls after you have bought) then you have to give the difference (known as MTM or marked to market) immediately to the broker. So, it’s advisable for those who don’t understand the dynamics of how the commodity market works to avoid buying through futures. There have been many cases in the past where individuals lost huge amount of money because of indulging in sheer speculation.
Diversify to balance
Experts recommend that you should hedge your risk by diversifying the portfolio. “It’s always a good ploy to invest in different financial instruments. So even if you are investing in gold futures or ETFs, it is always recommended to invest some part of your portfolio in other options to mitigate the risk,” says Vikas Vasal, partner, KPMG India, a renowned global consulting firm. Experts feel that gold, as a portfolio and risk diversifier, cannot be replaced. That’s primarily one of the reasons that today also all the major investors worldwide have 3 – 15% of their portfolio in gold.
Gold Talk
An ounce of gold has reached $800 for the first time since 1980. There is a perception among the people that the prices are running up due to festive season, but that’s not true. International factors like a weak US dollar and high crude prices have been the dominant reasons for price increases in recent months. Though experts widely accept that there’s no right time for investing in gold, some feel that as long as US economy is perceived weak and therefore the US$ is weak against other currencies and crude prices are high, gold will be seen as a hedge against crude-led inflation.
“The international geo-political situation remains tense. Asian countries such as India and China have fast increasing demand, and it’s unlikely that the prices will come down in the near term. Apart from demand being more than supply, a combination of above factors will ensure firm prices in the foreseeable future,” believes Manglik.
But Gupta has other thoughts. “Based on the fundamental and technical analysis, in the long run, say over a period of two years, gold prices are likely to come down,” he says.
