Some people just don’t understand gold or the role it plays in a post-financial crisis portfolio.
Gold is interesting to us as global investors for three reasons:
1) It is a “currency” that central banks can’t devalue.
2) It is a great hedge against inflation.
3) It is a great barometer of emerging market demand. That’s because about half the world’s above ground stock of gold is in the form of jewelry. And demand here is mostly driven by Indian and Chinese consumers.
I’ve already written about these aspects of the gold market. And why I believe they make owning gold a must right now in any global portfolio.
What I want to talk about today is a new development in the emerging markets. One that could send gold into a mania phase of buying.
The Rise of India’s Gold ETFs
I’m talking about the rise of gold exchange-traded funds (ETFs) in India.
India is already the biggest market for gold jewelry. But this year Indian demand for gold ETFs – that allow investors to track the price of gold in a portfolio without owning any physical metal – has skyrocketed.
In fact, assets under management of gold ETFs in India were up by 58.3% by the end of June. That’s a massive increase.
And it’s no wonder Indians are buying. ETFs have two big advantages over owning physical gold – whether in the form of bars and coins or as jewelry.
1) They are highly liquid – ETFs trade on regular exchanges just like stocks. That means you can buy and sell at any time for the same fee your broker charges you for buying or selling stocks. Selling gold coins, bars or jewelry, on the other hand, takes time. By the time a transaction is completed, the price of gold has likely already moved.
2) They are low cost – ETFs charge relatively low fees – what are known as “expense ratios.” My favorite gold ETF, the ETFs Gold Trust (NYSE:SGOL), which stores gold bars on your behalf in vaults in Zurich, has an expense ratio of 0.39%. Another popular gold ETF, the World Gold Council-backed SPDR Gold Trust (NYSE:GLD) has an expense ratio of 0.40%. Gold jewelry can only be bought at a premium to the market price of gold. Ditto gold coins. The cost of storing and securing these items can also be high. And often there are doubt over purity.
For Indians, there is also a tax advantage built into gold ETFs over physical gold. There is no wealth tax or value-added tax if an Indian investor buys units of a gold ETF.
Also, the recent performance of gold has been very attractive indeed. Gold ETFs returned 22% in 2010. And they have gained over 6% in the first half of the year.
A Win-Win Investment
Gold is one of those win-win investments I love to own.
One the one hand, there is a huge surge in demand from emerging market consumers – particularly in India and China. In this respect, gold is a play on higher incomes in these fast-growing emerging powerhouses.
On the other hand, gold offers great protection from the devaluing of currencies and other financial mischief. It is the world’s only “honest currency,” in other words. So even without rising emerging market demand, it is set to do well.
The price of gold shot up last week in response to the twin threats of default in Europe and the U.S. At writing the gold futures contracts are trading in New York at a record (nominal) high of $1,592/oz.
As more and more Indians and Chinese can afford to buy gold…and dark clouds continue to hang over the ability of developed nations to pay back their debts…gold will continue to climb past the $1,600/oz mark and beyond.
If you haven’t already, consider adding a physical-gold backed ETF such as SGOL or GLD to your global investment portfolio.