After delivering an exceptional 22.16 per cent annualized return in 2008 during the global economic slowdown and following it up with a decent 22.25 % in 2009, gold ETFs have not had a great run so far this year. But its performance during turbulent times as indicated by its robust performance in 2008 and 2009 makes a strong case for gold as a ‘must have’ holding in your clients’ portfolio.
A case for gold as an investment
Gold has historically returned 9% CAGR over the last 40 years. The other attractions are:
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Gold is a hedge against inflation.
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It holds its value in the event of political uncertainties.
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It has traditionally a negative correlation with other asset classes such as stocks, fixed income securities and commodities. Similarly, crises such as wars, which have a negative impact on prices of most asset classes, have a positive impact on gold prices since the demand for gold goes up as a safe haven for parking funds.
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It is the only medium of exchange completely free of credit risk as it does not imply a liability for any other entity.
Gold protects your portfolio from volatility because macro-economic and micro-economic factors do not significantly influence the price of gold.
These are reasons enough why gold should be included in your investor's portfolio paper form.
Advantage gold ETFs
Investing in gold ETFs will give the investor all the advantages of investing in gold while eliminating drawbacks of physical gold - cost of storage, liquidity and purity among others.
Gold ETFs are transparent investment vehicles that have to conform to rigid regulations on investment norms and valuations. This assures the quality of gold that the fund will invest in and transparency in calculation of NAVs and consequently the market price at which these units will trade.
Gold ETFs allow investment in gold in small denominations which makes it easier for the retail investor to participate. On the secondary market, the minimum lot is one unit. This enables your investor to accumulate units over time and reap the benefits of rupee cost averaging. The units can be redeemed either from the fund directly or from the market.
Further, investing in paper gold gives investors’ tax advantages over investing in physical gold. Gold ETF units held for more than one year qualify for long-term capital gains at 20 per cent, whereas the holding period in physical form has to be three years to qualify for long-term capital gains. For less than three years, the gains are treated as short-term and taxed accordingly for physical gold. Also, gold held in paper form is not liable for wealth tax.
Summing up, gold ETFs are an attractive diversification option for your clients.