Gold investments demystified

One of the most profitable investments during these tough economic conditions across the world has been gold. There has been a sharp rise in the price of gold over the last one year, which has led to increasing investor interest in the yellow metal. Today, one of the most popular routes to invest in this precious metal has been the exchange traded fund (ETF). Using ETFs enables investors to get an exposure to gold in their portfolio. While looking at this route there are also some other details that have to be considered for the purpose of ensuring that all angles related to the investment are covered.

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Gold ETF

There are several gold ETFs that have been launched by mutual funds in the country. These are mutual fund schemes that are listed on the stock exchanges and an investor can buy and sell the units in the scheme just like he/she trades a stock. The transactions in an ETF can be done at any time during the day when the stock exchange is open for business, and hence it provides an element of flexibility for the investor. The best part of the investment is that the investor does not have to wait till the end of the day for the value to be known and he/she can make use of the price change that takes place during the day to benefit from the changing situation.

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Linked to Gold

The main theme of the entire investment is that the price of the ETF is linked to the price of gold. This means that when an investor is buying an ETF, he/she has a direct exposure to the price of gold. Whenever the investor feels that the price of gold is going to rise and he/she would like to benefit from the move then he/she can buy the gold ETF and then gain from the rise when it occurs. The other point is also that transacting in this route is cheap because the cost for the investor is just the brokerage fee that he/she will pay for the transaction. In addition, there is the management expense of the fund, but this is low and is directly adjusted in the net asset value, so the investor does not have to pay this separately.

Also Read How to Invest in Gold?

Limitation

The benefit that is witnessed in the form of gold ETF also represents a sort of limitation for the investor. This is because the instrument is appropriate in order to gain from the rise in the value but at the same time this cannot help an investor profit in case there is going to be a fall in the value of gold.

There are times when the investor might also have a view that the price of gold may fall and in several cases he/she might be correct in such an assessment too. In such a situation, the investor would like to ensure that he/she gains from the knowledge of this expected price movement. If investors want to ensure that they make use of only the gold ETF then there is nothing that they can do in terms of gaining from such a view because in case of a price fall the gold ETF will also come down. Investors cannot sell such units without having them in their portfolios. This is different from the use of gold futures where these can be sold to gain from a fall in price.

However, investors can try and ensure that they do not end up losing when the price of gold actually falls. This can be done by selling off the existing gold ETF holding before the expected price reduction. In case the price actually falls as per the expectation then the investors can buy the units again and gain when the price rises in the future. However, it is not necessary that the prices have to rise after a certain fall and it can be quite some time before there is actually another rise in the price of the metal. In such a situation, this route is inadequate for the investor who would have no option but to turn to the futures market.

At the same time, even though there are liquidity features in the gold ETF, investors have to understand that there has to be significant price movements to justify regular trading in such units. In that sense, for a normal small investor the gold ETF is a medium- to long-term investment.

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