Are Gold ETFs safe?

India has been the largest consumer of gold. The motive behind buying has always been savings or investments as gold is considered a perfect store of value and a lender of last resort. Jewellery purchases usually constitute about 60-70% of the total, while the rest is accounted for by coins and bars which are sold at a premium of 5- 15%.

A new entrant in this space is the ‘Gold ETF’ which has made the entire buying process convenient and more reasonable since it comes without high premiums and making charges. With a rise in awareness about gold ETFs, an increasing number of investors are buying gold through this route. However, there are still a few who are more comfortable with the touch and feel of the yellow metal, and are a little wary of adapting to ETFs as a means of investing in gold.

"What if the gold ETFs set up another paper bubble in the making, even though the fine print says all ETF gold investments translates into real hard gold purchases for the investor?" asked the email.

A valid question, given the backdrop of the financial crisis and the Satyam saga that we all witnessed with disbelief and anxiety.

While I would have liked to explain the practices adopted for managing gold ETFs overseas and in India, it would be extremely difficult to predict the same. However, I can definitely tell you about how we manage your investments in the Quantum Gold ETF.

You might like to know that the Quantum Gold ETF is a passively managed fund. What that simply means is that we do not take a call on the price of gold nor do we try to time the market.

With regards to the assurance of value of the ETF, we ensure that each Quantum Gold ETF unit is adequately backed by physical gold. We acquire the physical gold before we commence the creation of the equivalent ETF units.

The physical gold is sourced strictly from refiners accredited by the London Bullion Market Association. Each gold bar that the custodian accepts on behalf of the fund is verified and substantiated by legal documents stating information on origin, purity certificate, and import details.

The gold also gets physically verified on a regular basis. The custodian’s daily physical holding statement submits details of each bar we hold, while the auditors physically check the gold on a monthly basis.

Other than these checks, our team at Quantum also visits the vaults every month to personally verify the holdings. For the purpose of highlighting the detailing involved in these visits, here is a brief description.

Firstly, only authorized personnel are allowed entry. Before visiting these vaults, I considered airport security checks tedious, now they seem like a breeze in comparison, because that’s just the way visitors are scanned before entering the vault premises. Armed security and electronic monitoring only add to the ambience, which is guarded by multiple gates and metal detectors.

Once you have passed through the security checks, you are escorted to the lockers where the gold is stored in boxes, each box carrying 25 kgs of gold. Both the lockers and the boxes carrying the gold, can be opened only one at a time.

Every single bar is personally checked and counted, while verifying the refiner’s check marks and other specifications like the weight and purity details. All details mentioned on the purity certificate are cross checked.

Apart from the high level of custody already entailed above, the entire gold held is completely insured.

Important details that investors should be aware of before investing in Gold ETFs

How is the fund managed?

Investors also need to be aware as to how the fund is managed. Is it managed in a passive manner? Does the fund manager take a call on gold prices?
If the fund manager takes calls on gold prices and manages the fund based on his expectations of gold prices, then there could be a significant risk in terms of delivering returns inline with gold.

Investments in physical gold

What proportion of funds assets are invested in physical gold? The closer the fund stays 100% invested in physical gold, the better it will be able to track prices.

Checks employed on gold

What types of custodial checks are employed for acceptance of gold in the fund? The rules and checks need to be strict and in line with best practices and norms followed internationally. The gold held should be physically verified and also audited on a regular basis.

Disclosures by the fund

There should be periodic disclosures by the fund regarding the amount of gold held.

Quantum Gold ETF is a passively managed fund. We endeavor to stay 100% invested in physical gold as much as possible. We only accept gold bars from refiners accredited by London Bullion Market Association and the gold held is completely insured.

Disclaimer:

The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments.

Investment Objective: Quantum Gold Fund`s (QGF) investment objective is to generate returns that are in line with the performance of gold, subject to tracking errors. Asset Allocation: QGF will primarily invest in physical gold and if allowed under SEBI Regulations, also in gold related securities, but may invest in money market instruments to meet liquidity needs. Terms of Issue: QGF is an open-ended Exchange Traded Fund. Each unit of QGF will be approximately equal to the price of half (1/2) gram of Gold. Units will be issued at NAV based prices. On an ongoing basis direct purchases from the Fund would be restricted to only Authorised Participants and Eligible Investors. Units of QGF can be bought /sold like any other stock on the National Stock Exchange of India Ltd (NSE) or on any other stock exchanges where it is listed. Entry Load: Nil Exit Load: In case of QGF: Nil in case of Authorised Participants; 0.5% in case of Eligible Investors. Risk Factors: All Mutual Funds and securities investments are subject to market risks including uncertainty of dividend distributions and the NAV of the schemes may go up or down depending upon the factors and forces affecting the gold and securities markets and there is no assurance or guarantee that the objectives of the scheme will be achieved. Quantum Gold Fund, is the name of the scheme and does not in any manner indicate either the quality of the Scheme, its future prospects or returns. Scheme Specific Risk: QGF is the first gold scheme being launched by the AMC. The AMC has no previous experience in managing gold scheme. The QGF’s NAV will react to the Gold price movements. The Investor may lose money over short or long period due to fluctuation in Scheme’s NAV in response to factors such as economic and political developments, changes in interest rates and perceived trends in bullion prices, market movement and over longer periods during market downturns. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of these investments of the QGF. It is to be distinctly understood that the permission given by NSE should not in any way be deemed or construed that the Scheme Information Document for QGF has cleared or approved by NSE nor does it certify the correctness or completeness of any of the contents of the said Scheme Information Document. The investors are advised to refer to the Scheme Information Document of QGF for full text of the ‘Disclaimer Clause of NSE’. Statutory Details: Quantum Mutual Fund (Fund) has been constituted as a Trust under the Indian Trusts Act, 1882.Sponsors: Quantum Advisors Private Limited. (Liability of Sponsor limited to Rs. 1,00,000/-)Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956..The past performance of the Sponsor / AMC/ Fund has no bearing on the expected performance of the scheme. Mutual Funds investments are subject to marker risks. Please read the Scheme Information Document / Key Information Memorandum / Statement of Additional Information / Addenda carefully before investing. Scheme Information Documents /Key Information Memorandums/ Statement of Additional Information can be obtained at any of our Investor Service Centers or at the office of the AMC 505, Regent Chambers, 5th Floor, Nariman Point, Mumbai – 400 021 or on AMC website www.QuantumAMC.Com