InvestorQ : What is the reason that Gold ETF's have shown more than 100% returns in last one year?
Ayushi Kampani made post

What is the reason that Gold ETF's have shown more than 100% returns in last one year?

preetam lenka answered.
2 years ago

A gold ETF invests its entire corpus in physical gold bars. Gold ETFs in India aim to track the price of the metal, passively. So, if gold prices go up, the gold ETF’s net asset value (NAV) goes up, and vice versa.

The price of gold per 10 grams has fallen by Rs4,358 or 3% from its peak price of Rs32,943 it touched in August 2013. But should you merely chase gold ETFs because you expect gold prices to rise or sell when you see prices fall? Let us understand how and why gold prices move up or down.

Since India imports much of its gold, the Indian gold price tracks the dollar denominated international gold prices closely, as quoted on the London Bullion Market Association (LBMA).

“Since we don’t mine much gold, we import most of it. Hence, the gold prices that we see in India are the derived prices; derived from the US gold price. When India imports gold, the price gets converted to Indian rupees, import duty of 10% plus the goods and service tax of 3% gets added to it, and you get the Indian gold price," said Chirag Mehta, senior fund manager–alternate investments, Quantum Asset Management Co. Ltd. That takes us to the US market and what impacts gold there. Gold prices, by themselves don’t move much. The movements depend on how other assets move.

Unlike the equity markets that move based on how the underlying companies in the benchmark indices perform in terms of sales, profitability and business, gold as an asset doesn’t have any underlying fundamental. “Gold, inherently, doesn’t give you any return, like how a bond gives us an interest or equities give us dividends. Gold is a commodity. You only earn from commodities when their prices go up," said Harshal Barot, analyst, Moti*** Oswal Financial Services Ltd.

Take equities, for instance. When equity markets do well, gold prices are usually subdued. Between 2008 and 2013, when the Sen*** returned 2.12% post the global credit crisis, gold prices zoomed and returned 22%.

“At the time, people saw gold as a safe asset and therefore a lot of money shifted to gold," said Ritesh Jain, chief investment officer, BNP Paribas Asset Management (India) Ltd. Another reason why gold prices move is movement in currencies. Before the global currencies came into being, gold was long used as the official currency.

Even today, gold is considered as an alternative to currency. If the US dollar moves up against various global currencies, gold prices drop, and vice versa