Gold ETF – a review January 09, 2010

We had issued two reports on Gold / Gold Exchange Traded Funds (ETF) on March 13, 2008 and 14 February 2009. Given below is an
update on Gold and Gold ETF.

What is Gold ETF?

Gold as a precious metal has been an extremely popular asset in India. It forms a part of every wedding and is considered as more
than just another asset. Gold as an asset class is gaining a lot of importance lately especially after the recent upmove in the Gold
prices. Gold’s resilience in the meltdown in FY09 compared to other asset classes and its appeal as a hedge against inflation/currency
devaluation results in its investment demand. Gold ETFs (GETF) provide a good opportunity to invest in gold and gain out of the
expected upmove in gold prices
GETFs are innovative products that provide exposure to physical Gold, that trade on the exchange like a single stock. GETFs have a
number of advantages over traditional open-ended funds as they can be bought and sold on the exchange at prices that are usually
close to the actual intra-day NAV of the Scheme based on demand and supply. GETFs are structured in a manner, which allows
creating new units and redeeming outstanding units directly with the Fund, thereby ensuring that GETFs trade close to their actual
NAVs.
Units can also be bought and sold directly on the exchange. GETFs have all the benefits of low cost and transparency. Tracking Error
of GETFs is likely to be low as compared to a normal fund. Due to the Creation / Redemption of units through the in-kind mechanism
the Fund can keep lesser funds in cash. The returns on Gold ETFs (before expenses) largely correspond to the returns provided by
physical gold in stock market. Each unit provided by most of the Gold ETFs will be approximately equal to price of 1 (one) gram of Gold
except Quantum GETF, which is based on 0.5 gram of Gold.

Why invest in Gold ETF

Gold’s appeal as an alternative investment option remains high. Historically equities have performed better than gold barring certain
minor aberrations here and there. However, asset allocation is an important aspect of any investment strategy. By balancing asset
classes of different correlations, investors hope to maximize returns and minimize risk. While many investors may believe that their
portfolios are adequately diversified, they typically contain only three asset classes - stocks, bonds/fixed income instruments and cash.
To counter adverse movements in a particular asset or asset class, m any investors now strive to achieve more effective diversification
in their portfolios by incorporating alternative investments such as commodities.
While gold has shown strong returns over recent years, its most valuable contribution to a portfolio lies in the fact that it is not correlated
with most other assets. This is because the gold price is not driven by the same factors that drive the performance of other assets.
Demand for gold may continue to rise as investors diversify their portfolio with an asset that is not correlated with the equity markets. In
the meltdown seen in 2008-09, gold was not correlated with the other assets and hence saved.
Some of the advantages of Gold ETFs are:
§ Easy Accessibility - Can be easily bought / sold like any other stock on the exchange through terminals spread across the country.
§ Minimum investment for a GETF is one unit (which equals to 1 gm in most schemes), which is highly affordable for retail investors.
§ Protects long-term investors in Gold from the inflows a nd outflows of short-term investors as it is backed by physical Gold.
§ Helps in increasing liquidity of underlying gold market. It allows liquidity due to ability to trade during the day and expected to quote
near NAV during the course of trading day on an exchange where the units of the GETF are listed.
§ No need to hold physical gold – Gold ETF's are intended to offer investors a means of participating in the gold bullion market without
the necessity of taking physical delivery of gold through the trading of a security on a stock exchange. There are no storage and
security issues for investing in gold through ETFs. ETF units are credited/debited in the depository account held by investors.
§ Allows easy asset allocation and diversification - Investing in Gold as an asset class helps an investor diversify the portfolio.
It has become easier for investors to add gold to their portfolio without actually having to buy the bullion. To enable investors to
participate in the upside from gold prices, wealth managers are now offering structured products (based on underlying of Gold prices).
Such product offers the benefits of capital protection and a participation in the upside of Gold prices. Another way to take an exposure
to gold is through three funds that invest in funds that invest in gold mining stocks – eg. DSPBR World Gold, AIG World Gold and Birla
Sunlife CEF Global PMP. Rupee appreciation (dollar depreciation) helps in boosting their NAVs. The NAVs of these funds may not
always track the movement in gold prices as performance of the mining companies and sentiment towards equities also impact the
returns and hence a lag may often be observed in.
Recent Developments and Performance of Gold ETFs on the Indian bourses
The Reserve Bank of India bought 200 tonnes of gold from the International Monetary Fund in November 2009. It is thought of as the
ultimate currency as it came to the country’s rescue in 1991 when India faced its worst balance of payments crisis and had to pledge 67
tonnes of gold to shore up its dwindling foreign reserves.
Gold has been one of the best performing asset classes in 2009. The COMEX gold index was up 25% in 2009. Gold prices in India
have been up 23%. It is currently trading close to USD 1,130 per ounce after touching a high of $ 1,226 in early December 2009,
compared to the low of $681 in Oct 2008.

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The demand really is getting translated into ETFs slowly. But investors are gradually moving into gold ETFs for investment instead of
physical form. It has been seen that a lot of SIP type transactions take place as lots of investors buy one-one gold every month and the
number of investors have gone up to 60,000-65,000, nearly tripling in the last 4-5 months. The number of new accounts created by
Gold ETFs in India surged 57% between March and September 2009.
The overall AUM in Gold ETFs at the end of December 2009 was Rs 1,352 crs, up from Rs 717 crs in April 09 (source: AMFI website).
Corpus and recent performance of Indian Gold ETFs
Corpus as on Base NAV as on 1 Week 1 Month 6 Months 1 Year
Scheme Name 31st December 2009 31st December Absolute Absolute Absolute Absolute
Gold BeES 518.24 1651.25 -0.23 -5.40 14.78 22.75
Kotak GOLD ETF 64.32 1649.81 -0.23 -5.40 14.41 22.34
Quantum Gold Fund 15.06 821.14 -0.23 -5.40 14.39 22.22
Reliance Gold ETF 233.88 1604.78 -0.23 -5.42 14.38 22.01
SBI Gold Exchange Traded Fund 99.23 1681.55 -0.25 -5.49 13.84 N.A
UTI-Gold Exchange Traded Fund 254.86 1649.90 -0.23 -5.39 14.47 22.36
Source: Nav India

The prices of the 6 Gold ETFs have moved more or less in tandem with the price of Gold locally (except Quantum GETF that quotes at
a discount) . This can be observed from the chart below. The first chart shows the correlation between Gold prices and ETFs namely
Benchmark Gold Bees, Kotak Gold ETF, UTI Gold ETF. The second chart shows the correlation between Gold prices and Reliance
Gold ETF, SBI Gold ETF and Quantum Gold ETF. The price of Gold and Gold ETFs on the chart below are rebased to 100.

140
135
130
125
120
115
110
105
100
95
90
1/1/2009

2/1/2009

3/1/2009

4/1/2009

5/1/2009

6/1/2009

7/1/2009

8/1/2009

9/1/2009

1/1/2010
10/1/2009

11/1/2009

12/1/2009

Gold Bees Kotak UTI Gold

140
135
130
125
120
115
110
105
100
95
90
10/1/2009

11/1/2009

12/1/2009
1/1/2009

2/1/2009

3/1/2009

4/1/2009

5/1/2009

6/1/2009

7/1/2009

8/1/2009

9/1/2009

1/1/2010

SBI Reliance Quantum Gold

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The physical gold held by the Gold ETFs as on December 17th 2009 were healthy and Benchmark Gold ETF had the highest at 3.18
tonnes of Gold.

Physical Gold held by Gold ETFs as on 17th December 2009

3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Gold Bees UTI Kotak Quantum Reliance SBI

The overall AUM of the Gold ETFs on the Indian bourses has continued growing till December 2009 as per the data of AMFI India. The
total AUM of Gold ETFs stood at Rs 781 crs in February 2009. This increased to Rs 1352 crs in December 2009. The growth has been
consistent throughout the last few months for Gold ETFs.

Gold ETF AUM

1600 20000
1400
1200 15000
1000
800 10000
600
400 5000
200
0 0
May-09

Nov-09
Apr-09

Aug-09

Sep-09
Jan-09

Jun-09

Jul-09

Oct-09

Dec-09
Feb-09

Mar-09

Gold ETFs AUM Avg Gold Price

The monthly fresh inflows that came into the Gold ETFs also increased over the last few months from Rs 30 crs in January 2009 to Rs
175 crs in December 2009.

Period Fresh Inflows - Rs Crs

Jan-09 30
Feb-09 3
Mar-09 6
Apr-09 16
May-09 116
Jun-09 34
Jul-09 45
Aug-09 18
Sep-09 106
Oct-09 57
Nov-09 95
Dec-09 175
Total 701
Source: AMFI

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Tables showing the average number of units traded and the average turnover of Gold ETFs on a monthly basis

Avg number of units traded
Gold BeES
Kotak GOLD ETF
Quantum Gold Fund (G)
Reliance Gold ETF
SBI Gold Exchange Traded Fund
UTI-Gold Exchange Traded Fund
Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09
15922.736281.3 23966.6 17882.8 13132.2 12407.8 10912.0 9183.935209.2 30530.1 44832.7 54246.6
2039.3 3031.3 2170.5 1337.0 1238.0 1278.1 1254.7 996.6 4440.1 4165.6 5614.4 7079.3
506.3 681.8 775.9 823.8 454.1 1224.8 661.6 503.0 1333.0 460.6 937.2 1051.5
4483.95 8573.0 5566.8 3665.2 3423.9 4178.2 2209.5 2530.4 6368.9 4237.3 9427.9 16053.2
- - - - 2585.0 672.9 1399.0 1232.111123.9 1651.9 2640.4 3176.5
5291.6 8567.5 5420.3 4227.1 2983.8 2827.4 2204.2 2585.0 7360.8 6062.8 8376.0 9288.0
Source: NSE

Avg turnover in Rs lakhs Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09
Gold BeES 213.9 537.6 361.4 257.3 188.4 180.4 158.8 136.0 551.3 479.4 760.0 923.0
Kotak GOLD ETF 27.4 45.0 32.7 19.1 17.7 18.5 18.3 14.7 69.0 65.0 95.6 119.7
Quantum Gold Fund (G) 3.4 5.0 5.8 5.9 3.3 8.9 4.7 3.8 10.4 3.6 8.0 8.9
Reliance Gold Exchange Traded Fund 58.5 125.3 81.3 51.3 47.5 58.9 40.2 26.6 96.7 64.7 156.1 264.2
SBI Gold Exchange Traded Fund (G) - - - - 37.6 10.0 20.9 18.6 177.1 26.4 45.8 54.8
UTI-Gold Exchange Traded Fund (G) 70.7 127.1 81.4 60.4 42.7 41.1 32.2 38.4 115.3 95.1 142.7 158.0
Source: NSE

Assets in exchange-traded-funds backed by bullion have grown by 50% this year and holdings in SPDR alone, the world’s largest gold
ETF, have increased by 45% in 2009. Identifiable investment demand has grown considerably in the recent past and ETFs occupy the
major chunk of the same. Bullion held in the SPDR Gold Trust, the biggest ETF backed by the metal, increased to 1,126 tons in the
December. The fund held a record 1,134 tons on 1 June 2009. A similar trend can be seen in the AUM of Indian Gold ETFs, which has
grown from Rs. 781 cr in Feb 2009 to Rs. 1,352 cr in December 2009 (source AMFI website).

Risks to Gold ETFs

§ Trend reversal in Gold Prices
§ Lack of liquidity in Gold ETFs remains a major concern for investors. In India large institutional investors a nd hedge funds are not
major participants as in the west where they do so to cover their dollar exposure.
§ Rupee appreciation could depress returns
§ Jewellery gold demand could fall as gold remains at high prices.
§ Gold gives a lower rate of return in an upward trending equity market. Over the last 20 years, the average return from Gold has been
around 7%. So, if the past trend continues, one could expect around say 6-9% returns from gold in the long-term.
§ The rapid growth of gold exchange-traded funds is a two-edged sword for gold, increasing volatility both up and down. By facilitating
gold investment and ownership by individuals and institutions they have, without a doubt, brought significant numbers of new
participants to the market and boosted buying by veteran gold investors as well. This has already contributed to the increased short-
term day-to-day gold-price volatility over the past year and it is likely to contribute to the long-term cyclical volatility as well.

Conclusion
The consistent growth shown by Gold ETFs over the last few months has been really remarkable. The investors’ mentality switch from
physical gold into the ETFs has helped increase the AUM of the 6 Gold ETFs listed on the Indian markets. Expectation for further
reserve diversification as well as prospects for further dollar weakness and fears over inflation in 2010 have all fuelled investment
demand for the precious metal, and could lead to further prices gains. Globally, investment into gold ETFs is close to $45 billion against
$5 billion into gold mining company funds. So, investment preference and trends are clear.

Gold investments stock comprises only 0.58% of total assets and is yet to reach a meaningful and optimum level of 10-15% of total
assets. Hence, we believe, a euphoric stage has not yet been reached with respect to gold prices. In fact, analysis suggests that the
real value of gold may fluctuate in the short term, but that it has consistently returned to its historic purchasing power parity with respect
to other commodities over the very long term. Consequently, over a long period, gold may be an effective tool for preserving wealth.

Gold carries a statistically insignificant correlation of 0.05 with the global stock markets over 10 years. Nor are the commodity
influences on gold very strong; the CRB Index’ correlation with gold is at just 0.2. The only asset with which gold does display a
correlation is with the US Dollar Index, at a negative 0.48. What this essentially means is that gold and the dollar tend to move in
opposite directions. This suggests that a weaker dollar will be a key cue to watch, for investors seeking to ride a gold price rise. As far
as Indian investors are concerned, the behavior of Rupee vs the US Dollar is another determinant of the returns they would make on
investments in Gold ETF. While the medium term view on the Rupee is positive, there could be some weakness in the near term in
Rupee as the US economy shows signs of a faster recovery. This could mean that the Rupee could first depreciate a bit in the near
term and later reverse course. Gold prices and in turn Gold ETF prices have corrected from the high of Rs.18,200 per 10 gm to the
current levels of Rs.16,800 giving another chance to investors to start adding Gold to their portfolio of assets.

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