Gold-Backed ETFs Vs Gold; A look At Direct And Indirect Investment Approach

  • September 06, 2019 11:56 PM AEST
  • Team Kalkine
Gold-Backed ETFs Vs Gold; A look At Direct And Indirect Investment Approach

Gold- the ultimate safe haven is witnessing a demand rush in the international market, which is propelling the gold prices higher and higher. The gold spot reached US$1,557.09 (Day’s high on 4 September 2019) by surpassing the previous month high of US$1,555.23.

While the gold prices are witnessing a demand rush amid strong fundamentals, it is always better to consider the smart ways for investing in gold to safeguard your investment at the times of high market volatility.

Also Read: Central Banks and Gold backed ETFs led Gold Shine; What’s next for the Safe-Haven?

Why invest in gold?

Gold as a safe haven prevents investment erosion, which could be experienced in the market with high volatility caused by global events such as trade war, Brexit, North Korea summit, etc. In the environment of great turmoil, gold appreciates in value, which further provides an investor with a decent return, without taking much exposure to the market risk.

However, investment in gold does not come without its drawbacks, which investors should understand prior allocating a tranche of their investment capital in gold.

Pros and Cons of Gold Investing:

Pros:

  1. Hedge against inflation
  2. Prevents drastic capital erosion
  3. Provides decent return
  4. Provides Hedge against systematic and non-systematic risk

Cons:

  1. Gold price trades sideways for long periods
  2. Non-coupon bearing asset
  3. Expensive as a physical Investment
  4. Storage issues for physical gold

While the pros and cons are many, depending upon how, what, and when; the manner in which one invests in gold could address and resolve the associated cons of gold investing.

Read Here: Smart Ways Of Investing And Storing Gold Amidst Gold Rush

In our previous article, we spoke about the smart ways of investing in gold, let us now take a comparative look at the better method to benefit from the gold price appreciation.

Investors can take exposure in gold either directly by entering into gold futures, or by buying physical gold, or even through investing in gold-backed ETFs and much more.

However, these days, gold-backed ETFs are gaining more attraction, when it comes to investing in gold as the gold-backed ETFs are highly structured products.

Gold-backed ETFs Vs Gold:

An investment in gold could be parked either directly in gold or the structured products related to gold such as gold-backed ETFs. The gold investment could be broadly categorised into the direct and indirect approach.

Taking long/short in futures and buying physical gold, comes under direct investment, while purchasing gold mining stocks, buying gold-backed ETFs, etc., comes under indirect investing.

Gold Investment (The Direct Approach):

Buying Physical Gold:

The easiest method of investing in gold is to buy it in the form of jewellery, bars or coins; however, the physical buying attracts a lot of additional charges, which in turn, diminishes the return profile, despite the price appreciation.

The gold jewellery generally witnesses hefty making charges, which usually offset the appreciation in gold to a certain extent depending upon the magnitude of the price change.

Likewise, bars and coins witness hefty quality check charges, which also offset gains from price appreciation, again depending upon the magnitude of the price change. On top of that, storing gold is an expensive and risky proposition.

Buying Gold Futures:

Buying gold futures contract comes in handy for maintaining exposure in gold; however, the high leverage provided by the futures contract magnifies the profit and loss value over the change in the gold price, which in turn, coupled with a mandatory contract switch on expiry causes many problems with the investment.

Gold Investment (The Indirect Approach):

Buying Gold Stocks:

Buying gold mining stocks give an investor exposure to gold indirectly amid business model of a gold miner. However, buying gold mining stocks puts the investment to a equity risk and return profile. In turn, removes the benefit of asset class diversification.

Structured Product:

Structured products are vast in number and can be tailored as per the specific requirement of an investor, which in turn, give these products high attraction in the market. One such example of a structured product is gold-backed ETFs.

Gold-Backed ETFs:

Gold-backed ETFs can also take a vast number of compositions such as physically backed, backed by securitisation, backed by stocks, etc.

Physical gold-backed ETFs buy physical gold and distribute units based on the amount allocated by the investor. The physical gold-backed ETFs offers a storage cost advantage over purchasing physical gold, as these ETFs buy physical gold and could be delivered whenever and wherever the investor insists.

However, the additional maintenance charge of physical gold-backed ETFs shows a similar pattern as investing directly in gold.

Some gold-backed ETFs also maintain exposure to gold mining stocks along with physical gold, which, in turn, gives an additional advantage over direct investment in gold.

Recently, the gold-backed ETFs have witnessed a very high capital inflow, which in turn, has nudged the ETFs houses to purchase a high quantity of gold.

Also Read: Gold ETFs register massive capital influx; while PDI, GPP, ERM, AME, RED Under Investors’ Lens

ETFS Metal Securities Australian Limited:

ETF Securities’ (ETF) ETFS Physical Gold (ASX: GOLD) crossed the A$1 billion mark on 4 September 2019, just recently in July 2019 the fund had crossed A$790 million mark. As per the data from ASX, the ETF reached the value of A$1,016 million.

The ETFs Metal Securities Australian Limited became the first commodity ETF in Australia to surpass the milestone level of A$1 billion, which in turn, led the ETF to join the rank among top global gold-backed ETFs such as SPDR (U.S.), BlackRock’s ishare, etc.

As on 6 September 2019, ETFS Metal Securities Australian Limited issued 115,000 redeemable preference shares at an issue price of A$214.05 per share.

The redeemable preference shares last traded at A$209.120 (as on 6 September 2019), down by 1.914 per cent as compared to its previous close on ASX.


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