Are Gold ETFs safe?
India has been the largest consumer of gold. The motive behind buying has always been savings or investments as gold is considered a perfect store of value and a lender of last resort. Jewellery purchases usually constitute about 60-70% of the total, while the rest is accounted for by coins and bars which are sold at a premium of 5- 15%.
A new entrant in this space is the 'Gold ETF' which has made the entire buying process convenient and more reasonable since it comes without high premiums and making charges. With a rise in awareness about gold ETFs, an increasing number of investors are buying gold through this route. However, there are still a few who are more comfortable with the touch and feel of the yellow metal, and are a little wary of adapting to ETFs as a means of investing in gold.
"What if the gold ETFs set up another paper bubble in the making, even though the fine print says all ETF gold investments translates into real hard gold purchases for the investor?" asked the email.
A valid question, given the backdrop of the financial crisis and the Satyam saga that we all witnessed with disbelief and anxiety.
While I would have liked to explain the practices adopted for managing gold ETFs overseas and in India, it would be extremely difficult to predict the same. However, I can definitely tell you about how we manage your investments in the Quantum Gold ETF.
You might like to know that the Quantum Gold ETF is a passively managed fund. What that simply means is that we do not take a call on the price of gold nor do we try to time the market.
With regards to the assurance of value of the ETF, we ensure that each Quantum Gold ETF unit is adequately backed by physical gold. We acquire the physical gold before we commence the creation of the equivalent ETF units.
The physical gold is sourced strictly from refiners accredited by the London Bullion Market Association. Each gold bar that the custodian accepts on behalf of the fund is verified and substantiated by legal documents stating information on origin, purity certificate, and import details.
The gold also gets physically verified on a regular basis. The custodian's daily physical holding statement submits details of each bar we hold, while the auditors physically check the gold on a monthly basis.
Other than these checks, our team at Quantum also visits the vaults every month to personally verify the holdings. For the purpose of highlighting the detailing involved in these visits, here is a brief description.
Firstly, only authorized personnel are allowed entry. Before visiting these vaults, I considered airport security checks tedious, now they seem like a breeze in comparison, because that's just the way visitors are scanned before entering the vault premises. Armed security and electronic monitoring only add to the ambience, which is guarded by multiple gates and metal detectors.
Once you have passed through the security checks, you are escorted to the lockers where the gold is stored in boxes, each box carrying 25 kgs of gold. Both the lockers and the boxes carrying the gold, can be opened only one at a time.
Every single bar is personally checked and counted, while verifying the refiner's check marks and other specifications like the weight and purity details. All details mentioned on the purity certificate are cross checked.
Apart from the high level of custody already entailed above, the entire gold held is completely insured.
Other than what we have mentioned above about managing the Quantum Gold ETF, few important details that the investors should be properly aware of before making investments in Gold ETFs are summarized below:
How is the fund managed?
Investors also need to be aware as to how the fund is managed. Is it managed in a passive manner? Does the fund manager take a call on gold prices?
If the fund manager takes calls on gold prices and manages the fund based on his expectations of gold prices, then there could be a significant risk in terms of delivering returns inline with gold.
Investments in physical gold
What proportion of funds assets are invested in physical gold? The closer the fund stays 100% invested in physical gold, the better it will be able to track prices.
Checks employed on gold
What types of custodial checks are employed for acceptance of gold in the fund? The rules and checks need to be strict and in line with best practices and norms followed internationally. The gold held should be physically verified and also audited on a regular basis.
Disclosures by the fund
There should be periodic disclosures by the fund regarding the amount of gold held.
Quantum Gold ETF is a passively managed fund. We endeavor to stay 100% invested in physical gold as much as possible. We only accept gold bars from refiners accredited by London Bullion Market Association and the gold held is completely insured.
Chirag Mehta is Fund Manager, Commodities for Quantum Mutual Fund and manages the Quantum Gold Fund ETF and the Quantum Gold Savings Fund among others.
The views expressed in this Article are the personal views of the author Chirag Mehta and not views of Quantum Asset Management Company Private Limited(AMC), Quantum Trustee Company Private Limited (Trustee) and Quantum Mutual Fund (Fund). The AMC, Trustee and the Fund may or may not have the same view and DO not endorse this view.
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