A Critical Analysis on Gold ETFs

Summary

During 2004-06, the average return and risk of Dow Jones Industrial Average’s Index was 6.65% and 2.22% respectively. The UK – FTSE return and risk for the same period was 11.95% and 2.47% respectively. The German DAX Index registered an average return and risk of 19.11% and 3.52% respectively.

In terms of comparative assessment of systematic risk of Gold, the in the USA, Gold has a beta of 0.15 (in comparison to Dow Jones Industrial Averages), while in UK it is 0.48 and in Euro-Dax it is 0.095. This means that gold is an ideal asset for inclusion into investment portfolios for it has very low systematic risk. It is an ideal hedge against portfolio volatility.

The Coefficient of Variation of representative GETFs for the period of research are– for the USA 2.89, for UK 2.5 and 2.13 for Singapore, respectively. The Coefficient of Variation for Equities (as represented by respective Indices) are –for the USA 2.44, for UK 2.00 and for Singapore 1.93, respectively.

A comparison of Beta of GETFs with representative equity Indices across Asia, Europe and USA confirms why GETFs (and consequently gold) are considered as ideal hedges against inflation. While Beta of GETF (Singapore) and UK stand at 0.32 each, Beta’s of GETFs in USA is a mere 0.08. These results show that GETFs (like their underlying asset – gold), have low susceptibility to systematic risks.

These results clearly indicate that as an individual asset gold provides high returns as well as is a high risk investment, but it has a low coefficient of variation. Further, GETFs, with gold as the underlying objective are safer investments then equities. The advantage with gold and GETFs is that they have low Beta and are therefore less susceptible to systematic risks. Thus GETFs are “must haves” in every investment portfolio as they offer opportunities for “adequate risk diversification”.

Limitations of Study:

It is important to critically evaluate the results and the whole study on the primary data. The present study has certain limitations that need to be taken into account when considering the study and its contributions. This study has focused on a phenomenon that is a very extensive and major. Clearly, this represents a challenging task for research regardless of the more specific interests that the study may have. In this study, this extensive and complex phenomenon has been studied from a rather narrow empirical perspective. By understanding something about this particular case more in depth, I might eventually also learn something more apart from the research study and should be implemented in general. In this research report there are certain things which need to be explored and should be investigate at a big approach. I had faced a limitation during a research, which was regarding the feasibility of the appointments with the investors and there was certain limitations with organizations. Apart from that there were also some time constraints and cost constraints which limited the exposure of my research to a certain level. The report also contains much part of secondary data because of less participation of investors.

In addition to winding up the limitation and the perspectives of the research report, it was also very interesting to gain the knowledge and understanding of the topic and market analysis.

Conclusions:

India is the world's biggest consumer of gold, consuming 700-800 tonnes annually, the majority of which is used for jewellery. Gold ETFs are expected to be popular as investment-led buying for gold has pushed aside some of the demand for gold jewellery. Buying jewellery as an investment in gold can be expensive as charges in the form of making, storage and other services tend to increase the cost, while Gold-ETFs can be an effective investment tool to help one build significant wealth over time.

The study observes that the average annual return of Gold in USA during the period of research (2004-06) in USD was 107%. The return of Gold in Europe in GBP is 100% while the return of Gold in Euro is 106%.

The average annual risk of Gold in the USA (in terms of USD) was 9.49%, while it was 4.58% and 6.60% in UK (in terms of GBP) and Euro (in terms of Europe) respectively.

During 2004-06, the average return and risk of Dow Jones Industrial Averages Index was 6.65% and 2.22% respectively. The UK – FTSE return and risk for the same period was 11.95% and 2.47% respectively. The German DAX Index registered an average return and risk of 19.11% and 3.52% respectively.

In terms of comparative assessment of systematic risk of Gold, the in the USA, Gold has a beta of 0.15 (in comparison to Dow Jones Industrial Averages), while in UK it is 0.48 and in Euro-Dax it is 0.095. This means that gold is an ideal asset for inclusion into investment portfolios for it has very low systematic risk. It is an ideal hedge against portfolio volatility.

The Coefficient of Variation of representative GETFs for the period of research are– for the USA 2.89, for UK 2.5 and 2.13 for Singapore, respectively. The Coefficient of Variation for Equities (as represented by respective Indices) are –for the USA 2.44, for UK 2.00 and for Singapore 1.93, respectively.

A comparison of Beta of GETFs with representative equity Indices across Asia, Europe and USA confirms why GETFs (and consequently gold) are considered as ideal hedges against inflation. While Beta of GETF (Singapore) and UK stand at 0.32 each, Beta’s of GETFs in USA is a mere 0.08. These results show that GETFs (like their underlying asset – gold), have low susceptibility to systematic risks.

I believe ETFs offer a good service - and a service which is in every way better for gold buyers than gold futures (which are unbacked by gold bullion and thereby subject their holders to unknown risks of default during a crisis). We also understand that convenience, where the buyer has an existing brokerage account, may make ETFs an excellent choice for many investors.

Perhaps they are most appropriate to investment institutions - for who they were originally targeted - because so many funds are required to own instruments which are structured as securities and traded on a formal stock exchange.

However we believe several features - when taken together - make BullionVault the best available route to gold ownership available today - namely:

1. 100% pure gold to the full weight of the investment - and no weight discounts
2. Direct physical ownership with no complex trust deed
3. Multiple vault locations, and the flexibility to switch locations at speed
4. Much lower storage charges - which include insurance
5. Accessible price reporting
6. 24/7 dealing in three currencies
7. The proof of ownership by the Daily Audit and
8. Extremely competitive pricing with the ability to earn the spread

These results clearly indicate that as an individual asset gold provides high returns as well as is a high risk investment, but it has a low coefficient of variation. Further, GETFs, with gold as the underlying objective are safer investments then equities. The advantage with gold and GETFs is that they have low Beta and are therefore less susceptible to systematic risks. Thus GETFs are “must haves” in every investment portfolio as they offer opportunities for “adequate risk diversification”.

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The above article is a summary extract from the dissertation projects of the MBA and BBA students of Skyline College. Skyline, situated in Delhi and Gurgaon (NCR) is a premier institute providing management education specialising in MBA and BBA degrees and specialist courses for travel and tourism as well as mass communication.