Investing in Gold ETFs
Gold prices have corrected sharply in the past few weeks with the US
Federal Reserve winding up its stimulus programme. Long-term investors can use
this decline to accumulate gold with a minimum 3 year perspective.
At $1,170 ounce, prices are down 38% from their lifetime high.
Indian investors can start an SIP (systematic investment plan) in gold
exchange traded funds (ETFs) now. The largest and most liquid gold ETF in India
is Goldman Sachs’ gold ETF, GoldBeES. It trades at about Rs. 2,425.
Gold ETF units were trading at a considerable premium to their NAV (net
asset value) till recently due to supply disruptions following Government
restrictions on gold imports. However, they are now available in the market at
close to NAV price.
There are several factors that can help prevent a decline in gold prices
from current levels.
1. Prices have already fallen close to the cost of production. The global
average cost of mining an ounce of gold (including royalties, administration,
mine development &other related costs) is $ 1100 to $1300. This is almost
25% lower than in the past year, thanks to cost-cutting initiatives. With not
much leeway for further reduction in costs, any fall in gold price from the
current $1230 levels may see miners stop exploration.
2. Many junior miners in Australia have closed operations as it has
turned un-economical for them.
3. Supply is further restricted by the fact that gold reserves globally
are limited and new deposit discoveries are becoming rarer.
4. There is no let up in the demand for gold. Even as supply has been
growing at less than 2% in the last ten
years, gold demand, especially for bars & coins, has grown at nearly 17% on
a compounded average basis.
By investing in gold now you can also make some currency-related gains if
the rupee weakens. Gold can be a good diversifier as it has a negative
correlation with most other asset classes.
