Gold ETF vs Actual Gold Prices

POSTED BY Ashutosh Tewari ON May 13, 2013 12:26 pm COMMENTS (8)

There is a good article in Economic Times explaining the pros and cons of various methods of investing in Gold –

For Gold ETF they mention that “The biggest problem faced by ETF investors, however, is the lack of liquidity in some ETF counters. So you should always consider a gold ETF that has sufficient cash reserves.” 

Two questions came to my mind –

1. How can a retail investor check the cash reserves of a MF company ?

2. The NAV of Goldman Sachs Gold Exchange Scheme (the most active ETF) as of today is Rs. 2561.93 whereas the rate on MCX for 10gm is Rs. 26854 (i.e. Rs. 2685.40 per gram). Why is there a gap between the rates ? 



8 replies on this article “Gold ETF vs Actual Gold Prices”

  1. bharat shah says:

    Ashal’s answer made me think deep considering tax issue. though not exactly related to the query , i like to make following suggestions:

    if you want to invest for giving it to your kid on his/her marriage , or just for your use (for making jewelry latter) i.e. not for sale latter, better to think other ways i.e. E-Gold and even physical gold as per your own comfort level. particularly for long term planning ,they are better than Gold ETF.
    If you are inclined for Gold ETF, better invest in your non earning family member to save any tax.

  2. Dear Ashutosh, from taxation point of view, please go for a bit higher investment. The reason is Units sold after holding more than a year ‘ll be eligible for LTCG & thus ‘ll be taxed @ 10.3% with out indexation or 20.6% with indexation. Whereas for units less than 1Y holding, the slab rate you ‘ll be in at that time. ‘ll be the income tax rate for STCG on such units.

    My take, if your aim is to collect 100 gm gold after 3Y, please target 120 gm gold to nullify this tax impact.



  3. bharat shah says:

    further as your investment period is short @3 yrs , you may estimate @ 3-6% more gold units for reaching your target, and clearly understand that you will get only money on redemption at the prevailing price of unit then and not gold, as minimum quantity for getting gold as 1000 units.

  4. bharat shah says:

    ‘how much of Gold is 1 unit of the ETF scheme equivalent to ? ‘
    it is different for different gold etf at the same time , and even different for different time of the same gold etf fund, because though all(except that from QUANTUM ) they follow price of 1gm of 24 ct. gold at starting of the fund, they have to provide expenses at rate of @ 1% per annum , they have to provide it from its AUM, which is predominantly in gold only, so it will be lesser than 1 gm over a period at that rate. however for for exact figure you should refer the fact sheet.

  5. Thanks Bharat / Ashal for your response.

    So how much of Gold is 1 unit of the ETF scheme equivalent to ? The reason I am asking this is that I need to save for 100 grams Gold required in three years from now. According if I do backward calculation, I should be buying 3 grams per month. So what will be the best way to go about it ?

    I am currently holding 15 units in Goldman Sachs Gold Exchange Scheme.

    Please Suggest.

  6. Dear Ashutosh, the article is misleading. The liquidity of gold ETF units at exchange has nothing to do with the cash reserves the ETF holds. the liquidity on exchange simply means – if you want to buy, there should be enough sellers & if you want to sell there should be enough buyers. That’s the simple equation.

    Regarding the price, please do not MCX prices are fwd rate contracts whereas the correct price for benchmark should be taken from NSEL E-gold price (the spot price).



  7. bharat shah says:

    as i understand:
    1. one may check cash reserve from the fact sheet of the concerned mf etf on the AMC’s website.

    2. the difference due to probable for two reasons;
    a. a unit of any gold etf does not represent exactly 1 gm of 24 carat gold , but less , as the gold etf expenses are deducted (mostly at rate of @1% p.a.) from the AUM of the gold etf , which is mostly in form of gold. so in essence , older gold etf unit represents lesser gold than earlier gold etf unit.( it can change now , as gold of gold etf is allowed to deposit in gold scheme and earn some as per new rules)
    b. MCX rates are forward rates , whereas gold etf is based on spot rates of gold.

    1. Milan Somani says:

      You can check the details here

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