Gold Rate

Gold Rate

Gold exchange traded funds (ETFs), offered by 11 domestic mutual funds, have been a big hit with investors in the last couple of years with the attraction of capturing the appreciation in gold prices. But, an FCRB analysis reveals that the performance of the gold ETFs is not reflecting the movement in international gold prices. This is primarily because of foreign exchange rate fluctuations.

The oldest gold exchange traded fund, Benchmark Mutual Fund’s Gold BeES serves as a proxy for all gold ETFs since there is a strong co-relation of its net asset value (NAV) movement with that of the others. Its NAV movement, on a month-on-month basis, has been at significant variance with the international price of physical gold as reported by the London Gold Market Fixing and adopted by London Bullion Market Association (see graph). This is also the price used by all gold ETFs in the computation of their NAVs.

From May 2009 to May 2011, the London price of gold appreciated by 62.65 per cent but Benchmark’s Gold BeES appreciated by a lower quantum that is 49.28 per cent, with the difference between the two being 13.37 per cent. This was mainly on account of rupee-dollar exchange rate fluctuation. The rupee has appreciated by 10.04 per cent per cent from an exchange rate of Rs 50.09 to a dollar in early May 2009 to an exchange rate of Rs 45.06 to a dollar. The remainder of the difference would be on account of transaction costs and fund management fees.

Almost all the gold ETFs state in their scheme information documents (SIDs), which act as offer documents during their new fund offers, they aim to track the domestic price of physical gold as closely as possible and after factoring in expenses. This is highly misleading as Securities and Exchange Board of India's investment valuation norms for gold ETFs require them to value gold atLBMA's gold price in US dollars per troy ounce for gold subject to various adjustments including dollar-to-rupee conversion.

Thus, the actual benchmark for gold ETFs is not the domestic price of physical gold but the international (London) price expressed in domestic currency. As per the gold ETFs’ SIDs, the physical gold bars held by them conform to all the norms set by LBMA. This requires funds to either purchase gold bars outside India which satisfy the LBMA conditions and then bring them to India, after paying custom duties and other transportation costs, or get approved participants (the securities provider in ETFs) to deposit already-imported gold bars with them.

One source of domestic price of gold in Indian rupees is that reported by the Bombay Bullion Association (BBA). But, says Sanjiv Shah, executive director at Benchmark AMC, “You may get a price from a domestic source but I do not think one can trade at that price.”

The divergence of gold ETFs’ NAVs with the London price has been quite high in the last two years. In the last two years, the month-on-month variance has been more than one per cent, in nine out of 24 months.

So, if the London gold price moved up by two per cent from one month to another, the Mumbai gold price tended to move up by more than three per cent or by less than one per cent. But, interestingly, the NAVs of gold exchange traded funds co-relate strongly with BBA’s gold prices .