Gold Exchange Traded Fund (ETF)
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A gold ETF is an exchange traded fund that invests primarily in gold bullion or gold-producing companies. Gold exchange traded funds are also known as gold funds. The share prices of gold ETFs correlate closely with the spot price of gold.
The first gold exchange traded fund, Gold Bullion Securities (GBS), was launched in 2003 on the Australian Stock Exchange, trades under the ticker symbol “GOLD.” These securities are backed by gold that is both deposited and insured.
The introduction of GBS in Australia paved the way for the launch of a number of associated gold ETFs in other stock exchanges. Apart from the GBS (listed on ASX), similar gold ETFs, such as ETF Securities Gold Bullion Securities (LSE and Euronext), SPDR Gold Trust (NYSE, TYO and SEHK) and New Gold Issuer (JSE), have been listed. This group of gold ETFs is called ‘Exchange Traded Gold.’ This reserve of gold is sponsored by the World Gold Council. SPDR Gold Trust constitutes the largest part of this collection and is the most liquid gold ETF in the market.
How is a Gold Exchange Traded Fund traded?
Gold ETFs are traded in most of the major stock exchanges of the world, including bourses in New York, London, Paris, Zurich and Mumbai. For trading in gold ETFs, a commission (normally about 0.4%) is charged along with an annual storage fee. US based transactions, however, present an exception to this rule. Here, only a small fraction of the commission rate is charged by most brokers.
The annual expenses, such as insurance, storage and management fees, are charged by selling a small amount of gold that is represented by each certificate. Hence, the amount of gold in a certificate declines over time. In some countries, gold ETFs are used as a way to avoid VAT or sales tax.
Gold ETF: Benefits and Risks
One of the major advantages of a gold exchange traded fund is that it frees investors from the hassle of actually possessing gold in the physical form. At the same time, it gives them exposure to gold (which is a defensive investment) and fluctuations in its prices. Gold funds are used by hedgers against geopolitical instability.
However, the performance of these gold funds depends upon the efficiency of the arbitrage mechanism. Moreover, they are impacted by speculation, which makes their trading risk prone.
