Gain for existing investors can be pain for new entrants

The Centre’s many moves to curtail gold imports have had an unexpected effect. They have forced Indian investors to pay a premium over the true value to buy units of Gold Exchange Traded Funds (ETFs).

Earlier, one could buy ETF units at a stock exchange at or below the net asset value (NAV) of each scheme. But today the market prices for the 14 listed ETFs are trading 3-5 per cent above their NAVs. Goldman Sachs gold exchange traded scheme (gold BeES) — the largest gold ETF in the country — is trading at a premium of 5.5 per cent to its NAV. One unit of this fund now costs Rs 2,807 against its NAV of Rs 2,651.

The NAV of an ETF is calculated based on the rupee value of a gram of gold after factoring in the import duty and other costs.

What explains the premium? Market players attribute it to the scarcity of gold in the market. Chirag Mehta, Fund Manager - Commodities, Quantum AMC, explains: “Market prices of units track the price of gold in the physical market. In the physical market, prices are at a premium because of short supply.”

Basically, as each ETF unit has to be backed by an equal quantity of gold, funds cannot issue new units to investors without adding to their holdings of the precious metal. But, today, import of gold is tied to an export obligation of 20 per cent.

Funds are not in the gold export business and thus cannot import gold. This freezes the number of ETF units funds can put up for sale. Any additional demand for units pushes up gold ETF prices.

For new investors looking to buy ETFs now, shelling out this premium can reduce effective returns over the long term. If the curbs on gold imports are lifted or relaxed, ETF market prices can quickly fall back to NAV.

For existing investors in gold ETFs though, the premium element is a bonus. It has helped them earn a healthy return on their paper gold in the last few months. Anyone who bought Goldman Sachs Gold BeES in June at Rs 2,384 per unit stands to make 18 per cent on selling the units today. Of this, only 11 percentage points came from an appreciation in the NAV linked to gains in gold prices. The import duty hike chipped in with 2 percentage points. The ‘scarcity premium’ added 5 percentage points to the return.

rajalakshmi.sivam@thehindu.co.in

(This article was published on October 12, 2013)
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