Gold ETFs brought in 27% returns in last one year

Global media is full of stories hailing how safe is investments in gold and gold-related funds. But, even as the world is going gaga over the impeccable track record of gold as a safe haven during calamities and recession, there are sceptics who argue that this may be just a bubble waiting to burst soon.

Last week, global research firm GFMS waxed eloquent on the prospects of gold soaring to $1,100 per ounce and it forecast a solid gain for gold prices.

And, investors, after reading the robust gold rise, are putting more and more money into gold hoping to reap rich dividends at a time when the world is undergoing sever recession.

Such a situation is not at all surprising considering the fact that the gold is selling above $900 per ounce now. Remember around six years ago gold was at $325 per ounce.

But, one thing all the investors should remember is that the gold prices are soaring because of the presence of gold exchange traded funds (ETFs) and gold stock funds.

If you track the record of gold ETFs, you can see that during the past one year from April 1, 2008 to April 2 2009, gold ETFs brought in around 27 per cent returns while the equity fund category returned -36.76 per cent.

To add to that, across the globe equity market is down and in the recent weeks only the stocks started moving up. In India, Sensex started showing the rising trend while in US Wall Street also started climbing up following the stimulus packages announced by the Obama administration and G20.

Even when you are attracted to the allure of gold, there are certain worrying factors. The important issue isn’t whether an investor should consider investing in gold, but rather the logic behind it. Gold has been historically viewed as a safe haven. But that bit of wisdom does not seem to hold ground anymore. Due to the flooding of gold ETFs, the metal is now more of a paper asset whose value is increasingly driven by the demand and supply of paper gold on financial markets.

In March 2009, NASDAQ Dubai launched the region’s first Sharia-compliant tradable security backed by gold. Named Dubai Gold, it is the first ETF to list on NASDAQ Dubai.

In the first six weeks of the year, the buying by gold chasers drove more than 200 tonnes of gold bullion into SPDR Gold Shares, the world’s largest gold-backed ETF representing more than 1,000 tonnes of gold.

Gold ETFs have driven up investment demand because of the ease with which individuals may invest in the commodity. As a result, gold is now clearly subject to the same volatility as other financial assets, as investors’ interest flows in and out.

Again, according to experts, gold did not appear to be a great hedge against falling stock prices. When the global financial panic was at its peak in October 2008, gold prices were at their recent lows. International gold prices peaked in March 2008 and, from then till the end of October, gold fell by about 25 per cent.