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Gold ETF: The Best Way To Own Gold?
In the Spotlight | 21 August 2009
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By: Xavier Lim
Articles (51) Profile

When talk of inflation resurfaced in Apr-09, gold prices climbed over US$900 per ounce, hitting US$983 in early June. It has since drifted down to around US$930, thanks to factors such as India’s recent doubling of import tax on gold. Indeed, gold prices have been rising steadily over the past 8 years with prices tripling since 2002, while the Dow Jones Industrial Average is down around 10% during this period.

Recently, European central banks have agreed to extend a cap on gold sales for another five years, but reduced the maximum of total gold that could be sold under the agreement. Gold prices rose, topping US$962 per ounce after the announcement, from US$960.20 per ounce immediately. The European Central Bank said the overall cap on sales in the next five-year period would be reduced to 2,000 tonnes from the current 2,500 tonnes. Annual sales would not exceed 400 tonnes, it added.

With all indicators pointing to a high possibility of gold prices going up, investors may be tempted to invest in gold. However, some may worry about the storage, security and insurance of the physical gold bullion, which could turn out to be very costly.

The SPDR® Gold Shares (Gold Shares), the first commodity-based Exchange Traded Fund (ETF) listed on the Singapore Exchange (SGX) in Oct-06, may solve all these problems. Gold Shares allow investors to invest in gold more efficiently without having to hold physical gold and trade at 1/10 of the price of an ounce of gold in the global market. The ETF is sponsored by the World Gold Trust Services and marketed by State Street Global Advisors.

Gold Shares provide easy accessibility for investors to buy, sell and hold gold. The cost is also lower than that associated with the purchase, storage and insurance of physical gold. Moreover, the liquidity of Gold Shares can be created and redeemed by authorized participants in baskets of 100,000 shares (worth some US$9m at current prices) accordingly to market demand. The price of Gold Shares can be tracked daily and it is possible to buy or sell them continously throughout the trading day on the SGX at prices established by the market.

HEDGING FOR A RAINY DAY?
Experts have been advising investors to buy gold to hedge against inflation and the US dollar as they are negatively correlated. However, over the past four decades, gold has been one-third more volatile than the Standard & Poor’s 500-stock index, and has delivered a lower return; an annualized 8.4%, versus 9.1% for the S&P index, according to Steve Condon, director of investor advisory services at Truepoint Capital in Cincinnati.

This signifies that gold might not be a good form of an inflation hedging. Steve Condon further elaborated that after reaching a record high of US$850 per ounce in January 1980, gold price fell almost 44% in two months. Gold price did not even reach US$850 again until January 2008, meaning that it was flat while inflation rose 175%, according to Steve Condon’s calculation. Indeed, today’s gold price is far below its 1980 apex when inflation is factored in; that US$850 is worth US$2,206 in today’s dollars. One may also view it positively, as gold prices, once inflation is factored in, may soar up to US$2,206!

THE ‘REAL’ THING
It is true that Gold Shares provides easily accessible for investors to buy, sell and hold gold shares. However, I personally feel that if you possess real gold bullion, you own in the present a real tangible asset, which you can see, touch and sell at anytime – especially in a financial crisis when demand and prices soar. Importantly, gold bullion has an intrinsic value, thus, it is still the ultimate form of financial insurance. This is why every major central bank in the world still maintains a significant portion of their reserves in gold bullion and many, such as China, are now increasing their gold bullion reserves.

Moreover, having the physical gold bullion is not necessarily very costly. In fact, you do not have to worry about the high expenses of storage, security and insurance. What you need to do is to open a safe deposit box with the Banks or Certis CISCO Security Private Limited, costing you from S$199 to S$799 per annum for extra-small size to extra-large size boxes respectively.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

Please click here for more information about this author.

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