IDBI Mutual Fund is the latest to launch gold ETF; but gold cannot rise forever
Moneylife Digital Team 29 July 2011

Yes, the increasing price of gold continues to attract many buyers and investors. But did you know that gold has in fact gained just 8.9% on a compounded annual basis since 1991? And don’t be foolish to believe that the price will continue to rise always

IDBI Mutual Fund has announced the launch of a gold ETF fund, the latest to enter this segment after a series of ETFs launched recently by HDFC, ICICI and Birla Sun Life mutual funds.

IDBI Gold ETF is an open-ended gold exchange traded fund, like any other gold ETF, and there is nothing novel or different about it from the already existing gold ETFs.

A gold ETF is a paper asset designed to track the gold price without holding physical gold. But is gold a good asset to buy today? Nobody really knows. The price of the yellow metal has already jumped about six times over the past ten years, from $250 to around $1,500 and it may continue to rise or go down, depending on which way interest rates go.

Jumping into any asset that has already increased in value many times over does not make any sense, irrespective of the fact that it could head further up. The best investments are those that are available at a low price, are not very hot, and have started an uptrend, and not when they are already hot and you consider investing in anticipation that it would rise further.

Indians believe that the price of gold (as that of real estate) is always increasing. This is true. But let that not lead to blind belief. If you don't know by how much the price of gold has gone up over the past 20 years, or why, it would be blind to believe that it is going to continue to go up endlessly. It is a common belief that gold offers good returns over the long term. Again, not true. Since 1991, gold is up just 8.9% on a compounded annual basis. That hardly beats a recurring deposit scheme!

Gold is not an investment, but a speculative asset, influenced mainly by the dollar and US interest rates. If you invest in gold, you cannot be passive about it, expecting a rise year after year. Gold does well only in certain market conditions, that is, when real interest in the US is negative to zero. This has been the situation for a decade now and nobody knows how long it will continue. If it does, gold will rise further.

There are only speculative forces pushing up the price of gold, something that is beyond the grasp of an average saver. And I this is so, there is simply no logic in investing in gold. Of course, there is speculative merit aplenty, as long as you know when to pass it on to the next sucker.

The IDBI ETF will invest 95% to 100% of assets in gold and gold-related instruments with a medium-risk profile. On the other side, it would allocate up to 5% of assets in debt and money market instruments with low- to medium-risk profile.

The new fund offer price is Rs100 for cash at a premium equivalent to the difference between the allotment price and face value of Rs100. The allotment price would be approximately equal to the price of one gram of gold.

The scheme will be managed by Gautam Kaul and it will be benchmarked against the domestic price of physical gold.

1 decade ago
gold invest ment
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