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Should you buy ETF's instead of solid gold? - Outside View

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Should you buy ETF's instead of solid gold?
Sep 3, 2010

We consider Gold ETFs to be the "Best Financial Innovation". And that's not because we have a gold ETF offering but in fact it's the other way round!

Imagine if you were able to buy gold at prices very close to those at which tonnes and tonnes of gold get transacted between a producer/ refiner and a bullion bank or any other big institutional investor. No making charges, no premiums involved, you can buy even gram of gold at such prices, that's the beauty of gold ETFs.

Gold ETF's relieve gold buyers from the heavy premiums that are usually associated with buying gold in physical form at the retail level - be it coins / bars or gold jewelry.

Innovation needs to be synergized...

As per Wikipedia: "Synergy, in general, may be defined as two or more agents working together to produce a result not obtainable by any of the agents independently."

That's exactly the way forward to ease the burden of buying gold from the shoulders of the investors....

Two years ago, when we launched the Quantum Gold ETF, we tossed a question to a few gold jewellers. The question was - would they accept Gold ETF units in lieu of cash from investors when they want to convert some of their investments to jewelry form?

The thought was to pass on the efficiency of gold ETF to the end investor, to you. Gold purchasers can continue to accumulate gold in smaller quantities through gold ETF's and then when they are pressurized by their spouses, they can exchange their units for jewellry.

Some jewellers seemed to like the idea but majorities were not so convinced.

Under this arrangement, jewellers can recover the cost of gold from the ETF surrendered and then separately charge buyers for making charges and margins, if any.

This would surely bring in more transparency in the Gold buying process and allow investors to buy gold more efficiently.

The recent debate

I just attended a Gold conference where the same issue was discussed. The panelist who raised the proposal was also a Gold ETF issuer.

Some in the audience appreciated the idea whereas some showed a now familiar reluctance.

One of the other panelists, who dealt in jewelry / coins / bars, obviously rejected the idea. He was of the opinion that the two ends should be kept at length. Initially, he raised his doubts relating to the VAT issues, these were countered with possible solutions. Still, he continued his state of denial without giving acceptable reasons. Contrary, he added that we could do this for exchange of physical gold but not with ETFs! I am sure you are aware of the premiums involved in purchasing of gold coins and bars, it would thin your wallet out by a tidy sum.

I still don't understand the reason for his unwillingness. Gold ETFs are considered "As good as Gold" since units are backed by physical gold and can be converted to physical gold. If they accept Gold ETFs, they could convert these gold ETFs to physical gold which they can use for making jewelry and that they usually buy such gold from banks / wholesalers'.

Was this denial arising from years of wisdom gathered from being in gold business or from a sense of losing out on account of increased transparency?

I recently bought a piece of jewelry and the gold price charged was Rs. 1000 per 10 grams higher than the prevailing price. The making charges are over and above this premium charged. It could be these margins the jewelers wish to protect.

With exchange through ETFs, these margins are likely to be affected. Is this the reason for his denial or there's more to it which we fail to understand.

Innovation, the Need of the hour ...

Innovation as described by Wikipedia is a change in the thought process for doing something, or the useful application of new inventions or discoveries.

In keeping with our philosophy, we at Quantum have always strived to innovate for the betterment of investors:

  • The only gram gold ETF in the country
  • No distribution commissions
  • Focus on Investor education
We are trying to work on how the mechanism of this initiative - of selling ETFs to the retail investor and then exchanging ETFs for Gold; would pan out, as and when this facility does come into existence. This mechanism doesn't seem very difficult to operationalise if all concerned parties get involved.

The major hindrance currently is the resistance from the jewellers who need to partner us for this innovation.

We would surely continue to do our bit in our endeavor to innovate and try to synergize for the betterment of gold buyers and investors.

We want you to contribute by requesting your jewellers to accept gold ETF in lieu of your gold purchases.

As more consumers demand, jewellers would also realize the importance of this need and can help us move faster on our innovative effort. Disclaimer:
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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3 Responses to "Should you buy ETF's instead of solid gold?"

Thomas

Oct 17, 2010

How does the ETF Gold works out.What is the gain percentage like interest on the money spent on ETF gold.Is it available with all banks especially Axis bank.What will be the minimum period of investment like mutual fund .Whether it can be sold at any period of time.Appreciate your feedback on the above
Regards
Thomas

Like (1)

sundaravaradan

Sep 11, 2010

Hi,

When I buy Gold ETF and surrender ETF to Q-Gold fund, can I get Cash/Cheque? What other forms of encashment of ETF is allowed?
Can you give a numeric example of taxes +charges I pay, when BUYING ETF? What Taxes & Charges I pay While selling ETF? A work-sheet with numbers can help promote the concept to many customers troubled by Jweller's non-transparency and very high margins,wastage charges etc.
Can I buy the ETF from one fund and sell it to other Fund? What are the charges?

Like (1)

patient investor

Sep 10, 2010

Chirag,
Great article. One issue in people's mind may be the process of exchanging an ETF for physical gold? If this is an easy process, then maybe a demonstration of the same to the doubters could help speed the process along ..? For example, how do I surrender my ETF shares to the Quantum Gold Fund, and who delivers the gold to me, and what are the delivery charges, etc? Thanks.

Like (1)
  
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