Gold Exchange Traded Funds

Gold has remained one of the favorite avenues of investment for Indians. Around 23% of investment is done in gold by Indians.

Amid the current global turmoil and the bear run share-market scenario, people are going for the traditional and safer option of investment: gold. They are investing in the yellow metal in a significant volume. With the advantages of gold over any other form of investment — security being the most desired — people are buying gold in all forms, be it coins, biscuits or jewellery, besides exploring new options like Exchange Traded Fund (ETF).
I have seen many people are not familiar with gold ETF, which have become quite significant in past few years. So this post in brief will provide readers to explore this avenue of investment in this downturn.

What are ETF’s?
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

What is Gold ETF?
Gold ETFs provided investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.
Gold ETF provides return that before expenses closely corresponds to the returns provided by physical gold. Each unit is approximately equal to price of 1 gram gold. But, there are Gold ETFs which also provide a unit which is approximately equal to the price of ½ gram of Gold.

Brief history
The first proposal of a gold exchange traded fund was originated by an Indian company called Benchmark Asset Management; a proposal was launched with the SEBI (Securities Exchange Board Of India) in 2002. This proposal was not approved at that time.
The Australia Stock Exchange was the first to launch a gold exchange traded fund in 2003 by Gold Bullion Securities under the symbol ‘GOLD’. This fund was fully backed, insured and deposited by gold bullion.

Difference between Gold Etf’s & Mutual Funds
Disparate Asset Classes
It is the nature of asset classes which differentiate gold etfs and mutual funds from each other. While former falls under the category of commodities, later comes under equity category. In Gold Etfs investor is vested with the opportunity, to invest in units of gold, which are traded on exchange as single stock. The units issued under the scheme represent the value of gold held in scheme. However in case of mutual funds, fund mangers invest in equity and equity related securities of gold mining companies. Since gold mining companies are not listed on Indian stock exchanges, the gold mutual funds invest in world gold funds that invest in gold mining companies across the world.

Returns attainable
Basic motive behind any investment is to gain high returns. The world gold fund has given absolute returns of 31.9% in the period since its inception in August 2007 to July 2008. Most financial advisors advise that investment in gold must be made for the purpose of diversification and at any point in time, about 10-15% of your assets must be invested in gold.

Nature of funds
Basic aim of both the funds is another important point which differentiates both the funds from each other. “The fund simply buys and holds gold on behalf of the investor without actively managing it. The aim is to give returns as close as possible, post-expenses, to that given for gold as a commodity,” however when investing in a mutual fund, the investor can rely on the expertise of a fund manager who indulges in active portfolio management and is able to make crucial decisions regarding selecting stocks of gold companies.

Benefits of trading in ETF’S
In ETf’s investors have the opportunity of buying as less as 1 unit on the exchange. Investors don’t have to pay entry or exit load and expenses on brokerage are less. Here gold etf’s score over mutual funds as in case of later investor has to bear defined load structure, entry and exit loads and other expenses.

There are five gold ETFs in the market today, namely Gold BeEs, Kotak Gold, Quantum Gold, Reliance Gold, and UTI Gold ETF. According to data published by Value research online, the returns from all the gold ETFs over the last one year have been practically identical.

IF you take a look at gold prices in the past few months, they have been moving in just one direction-- upwards. From Rs 10, 650 for 10 grams last January 2008, the price has moved to Rs 15,490 today. Gold price is at a seven month high and is up by 10% since January this year. The World Gold Council reports that global demand was up by 4 per cent in 2008.

Gold and stock markets have negative correlation, which can be witnessed in current scenario where volatility in stock markets have led to sky rocketing gold prices.

In 2009 itself Gold etf’s have outperformed gold mutual funds. ETFs have given 29 per cent returns in 2008 and over 8 per cent till now in 2009. In this current financial turmoil investing in shining yellow metal turns out to be the safest bet!!

Inflation slided to 3.92%

Inflation eased to a 13-month low of 3.92% for the week ended February 7 on the back of a sharp fall in the prices of edible oils and
manufactured products. An ET poll had forecast that the inflation would fall to 3.91% for the week from 4.38% in the week before and 4.97% in the corresponding week last year. Inflation based on the wholesale price index has eased sharply from a 16-year peak of 12.91% in August 2008, due to a sharp fall in commodity prices
and a slowing demand. The drop in inflation has led to renewed calls for aggressive rate cuts to boost the flagging economy.

Fight of words: R Vs D

We all are familiar with ongoing financial crisis, but most of us don’t know whether to call it a financial recession or depression. I have seen many articles, papers where there is confusion between with what to quote current crisis with “recession or depression”.

Before finding an answer to this, let’s find out difference between the two:
On searching on various search engines the basic difference which, I got is as follows:
Recession: an extended decline in general business activity, typically three consecutive quarters of falling real gross national product.
Depression: a decline in real GDP that exceeds 10%, or one that lasts more than three years.

Therefore the above definitions indicate that the basic criteria of indentifying depression or recession are to measure extent of economic decline. A depression is simply a magnified version of recession. The last two depressions in the U.S. were both in the 1930s. From August of 1929 to March 1933, real GDP declined by approximately 33%. There was a period of recovery following this depression, but in 1937-38 the economy dipped again in a less severe depression. All other economic downturns since that time have been recessions or just plain old tough time.

Transpose of Recession to Depression
Recessions gets transformed into depression, when government applies wrong measures in controlling it.
According to James Pethokoukis, "4 Ways to Turn a Recession into a Depression (U. S. News 11/4/08), there are ways that good and bad policy can effect an economic downturn.
· Bank closures
Although the American taxpayer may well have to provide what is being called, "the mother of all bailouts" the Federal Reserve has already committed $7 billion to prevent the collapse and run on the banks. It has also raised the federal deposit insurance (FDIC) from $100,000 to $250,000 to discourage shaking depositors from withdrawing their cash.
· Increasing of taxes
During the period of great depression, according to the revenue act tax rate was raised from 25% to 63%. Economists regard this as one of the most inaccurate steps taken.
· Hawley –Smoot Tariff
As businesses were slowing down, to protect its own industries American government created a Hawley-Smoot tariff in 1930, which meant to charge high import tariffs on imports, this led to deterioration in global trade leading to economic retaliation.

New distinction between Recession & Depression
However there are economists who differ from above definitions of recession and depression. in present times they believe that difference between a recession and a depression is more than simply one of size or duration. In making distinction between the 2, cause of the downturn should also be taken into account. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level.
If we go back in past, economic downturns that followed the collapse of the Soviet Union and those during the Asian crisis were not really depressions according to this criterion. Another significant aspect of this distinction between a recession and a depression is that they call for different policy responses. A recession triggered by tight monetary policy can be cured by lower interest rates, but fiscal policy tends to be less effective because of the lags involved. By contrast, in a depression caused by falling asset prices, a credit crunch and deflation, conventional monetary policy is much less potent than fiscal policy and one tends fall into what is called as a “ liquidity trap”.
Present day situation
After all this discussion, the only question dwindle in our minds is “where we are today’? Well if we go by all definitions, America’s GDP may have fallen by an annualized 6% in the fourth quarter of 2008, and cause of this downturn is the largest asset-price and credit bubble in history—even bigger than that in Japan in the late 1980s or America in the late 1920s. So this means we are back to 1930’s?
Well many economists tend to deny this notion of 1930’s depression, because policymakers are unlikely to repeat the mistakes of the past. Though we are far off from situation of great depression, and policymakers won’t make same mistakes. But you never know they commit some new one’s as these are same policymakers who predicted that nationwide housing bubble burst is impossible, but today nothing is hidden, we all know the truth and truth is always bitter…..

Low Inflation Offset by Low IIP numbers

The lower inflation numbers failed to boost sentiment in the markets, which were dragged by the negative industrial numbers. The Sensex remained in the negative territory amid weak Asian markets.
The Sensex was down 62 points at 9556 levels.
The rate sensitive sectors realty, auto and banking stocks were mostly in the green in anticipation of a rate cut by the RBI. On the other hand, metals, IT and oil & gas stocks dragged the benchmark index.
The industrial production for December contracted by 2 per cent, as compared to 8.6 per cent growth a year earlier. The fall was led by a led by a 2.5 per cent contraction in the manufacturing output. Inflation for the week ended January 31 was at 4.39 per cent as compared to 5.07 per cent a week earlier

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