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Is your ETF as good as Gold - Outside View

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Is your ETF as good as Gold
Aug 12, 2010

Paper currencies are turning into a joke as global policy makers are creating "money out of thin air", without any real asset backing whatsoever. In times of such uncertainty, where do investors find solace? - They move towards the one currency that has proved its allure over centuries - Gold!

And such is the trend to which we stand witness; investments in gold are increasing, an encouraging sign for gold propagandists; but this new ‘rush for gold' has investors confused about the right way of owning gold - Is physical gold better? Or Should I invest in ETFs?

Uncertainty is the perfect breeding ground for suspicion, and hence in such times you could come across sinister theories about physically backed ETFs for gold (and other precious metals). Conspirators argue that Gold ETFs don't actually hold physical gold, and, definitely not as much as they claim they do.

With such exaggerated caution doing the rounds of cyberspace, reflected in the media and shared by your friendly next door neighbor - it is not surprising that you're still debating the prudence of ETFs.

An email I received recently exhibited a similar dilemma:

"Gold analysts have raised a lot of questions about validity of Gold ETFs which don't seem to be backed by full physical gold. Doesn't that make ETFs a kind of paper gold, backed fractionally by the real asset? I am confused about whether to invest in Gold ETFs vis-a-vis physical gold."

And so in response to this query: Yes, there have been many conspiracies floating in the market on international Gold ETFs. And while care must be taken to study the situation, an inflated sense of caution is not the ideal solution. In such scenarios, you must ask yourself: How true are these theories? Is this really applicable to the investments that you intend to make?

One important fact to understand is that though such products in international markets may sound similar in concept but domestic products are regulated by a different board and have a separate set of rules to abide by and hence may differ in intricacies/practices followed.

Here's a look at the guidelines we ensure while managing your investments in Quantum Gold ETF.

In Quantum Gold ETF:

  • Each unit is backed by physical gold of 0.995 purity manufactured only by London Bullion Market Association (LBMA) accredited refiners.

    • It invests only in physical gold and no derivative instruments are permitted.

  • Gold held by the fund is identifiable by the serial number which is unique for each gold bar. A bar list along with other refiner details are maintained by us and the custodian, which is cross checked during our verification visits to the gold vaults.

  • Gold held by the fund is in allocated accounts. This means that it is segregated and kept separately from all the other gold held by the custodian in the vault.

    • Quantum Gold Fund has been allocated one locker inside the vault which has a capacity to store up to 1 ton of gold.
    • Only and all, the gold belonging to Quantum Gold ETF is stored in this vault.

  • Gold held is not leased out and is always held in custody.

    • The current regulations do not permit leasing of gold held by the fund.

  • All the physical gold is regularly audited and also physically verified by the fund management team here on a monthly basis.

  • Each gold bar is accompanied by the necessary documents that evidence its origin, authenticity and purity.

  • All the gold held is completely insured including a cover for terrorism insurance.

As regards Gold ETFs, all the gold held is owned by the fund and is held with the custodian only for safekeeping. It is not the liability of the custodian and therefore does not entail any counterparty exposure as it is physically owned by the fund.

We would not able to verify the appropriateness of the various conspiracies floating, but we are sure about the safety of investments in Quantum Gold ETF. In simple words, Quantum Gold ETF is "as good as Gold"; rather a more efficient, convenient and hassle free way of owning gold.

The Golden Truth is authored by Chirag Mehta. Chirag is Fund Manager - Commodities at Quantum Mutual Fund. Views expressed in this article are entirely those of the author and should not be regarded as views of Quantum Mutual Fund, Quantum Asset Management Company Private Limited and Equitymaster. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Equitymaster has not verified the facts contained in this column and it does not accept any responsibility for the same. Please read the detailed Terms of Use of the web site

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1 Responses to "Is your ETF as good as Gold"


Sep 15, 2010

What is the difference between SBI GOLD ETF & SBI GOLD ETS ?
I have 2 contract notes from my broker mentioning the above.

Please clarify

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