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High Gold ETF premium

 

THERE is a strange situation that has been witnessed with respect to gold exchange-traded funds (ETFs) in recent times that poses a challenge for investors. The manner in which investors react would determine the extent of the returns that they could possibly earn from the investments and hence, there is a need to be careful on this front.

Gold ETFs have been trading in the market at a premium to their net asset value (NAV) and hence, decoding this situation is important both from the point of view of existing investor as well as for those who would like to put more money into gold ETFs.

Nature of instrument:

A gold ETF seeks to replicate the price of gold for the investor and hence, this is an opportunity for investors to use this as an instrument as a proxy for gold in their portfolio. When it comes to the exact nature of the instrument, the fund is actually traded on the exchange just like a stock, but its features are like that of a mutual fund. This is the reason why it is often said that the fund has features of both these instruments.

The idea behind trading on the exchange is to provide liquidity so that the investor can make use of the intraday changes taking place in the fund. There has to be an exact reflection of the net asset value in the price of the fund so that investors are able to properly make use of the basic feature of the fund.

Actual situation:

Now the situation is such that the traded price of gold ETFs are at a premium to their NAVs and on several days the difference is more then 6-7 per cent, which is significant. This has happened due to the fact that gold import has become very tough and funds are finding it difficult to meet the requirement of getting the actual gold to back the units that are being issued. This is being reflected in the premium that the trading price is actually seeing.

Investors:

There will be different position for various investors when they look at this specific situation. On one side are existing investors who find that the value that they get for their existing units are actually higher than what they would normally get.

This is because of the premium in the trading price that actually boosts the overall returns on the fund. The fact is that this premium is not going to stay for long and hence, those investors who want to make use of the situation can sell the units and book the extra profits that they are getting On the other hand, there are also new investors who are looking to enter the investment. If they are looking only for price appreciation then this additional premium is a risk that they will have to bear, because it can go away anytime and this will eat away the returns. However, longterm investors who are looking to invest for years on end can take this as a part of the overall investment process and they would not be much affected by small changes as their total investments will be small and they would be doing so many instalments in the coming time period.

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