Gold ETFs A Sound Option For Investors Seeking Safe Haven

Individuals looking for safe, sound and productive investments in the domestic market really have something to cheer about.

Last March, Nasdaq Dubai, in collaboration with the World Gold Council (WGC) and the Dubai Multi Commodities Centre (DMCC), launched the world's first Sharia compliant Gold Exchange traded funds (ETFs) called Dubai Gold Securities.

The product being exchange traded tracks the international gold price almost accurately and being Sharia compliant is completely backed by physically allocated gold held by its custodian (HSBC) in their London vault. (Dubai Gold Securities are backed by 400 ounce London good delivery gold bars). This aspect of physically guaranteeing gold, thus eliminating third party counter-party default (credit) risk makes this ETF rather unique.

Further, the small investment size of 1/10th of a troy ounce (equivalent to one security) makes it easily accessible to retail investors. Above all, gold's proven track record of superior performance makes it a safer bet compared to other asset classes, especially when the dollar is on a downward slide, given the fundamental reason of gold's negative correlation to the dollar.

Gold ETFs are relatively new investment products. The first gold ETFs were launched in March 2003 on the Australian Stock Exchange under Gold Bullion Securities (ticker symbol "gold"). Basically, gold ETFs are open-ended mutual fund schemes that invest in standard gold bullion of approximately 0.995 per cent purity. The investor's holding is denoted in units which are listed on a recognised stock exchange. Investors can buy and redeem the units either directly from the mutual fund house (subject to certain stipulations) or from the stock exchange itself. These funds, being passively managed, are designed to provide returns that closely track the returns of physical gold in the spot market. Investing in gold ETFs comes with all the advantages while eliminating the drawbacks related to holding physical gold such as cost of storage, liquidity and purity. Gold ETFs' transparency conforms to stringent regulations pertaining to investment norms and valuations.

Thus, the quality of gold that the fund invests in and transparency in calculation of NAVs (the market price at which these units will trade) are assured.

In some countries, investing in gold ETFs provides tax advantages. If held for more than one year, ETFs qualify for long-term capital gains at 20 per cent, in contrast to the holding period in physical form that has to be three years to qualify for long-term capital gains. For less than three years, the gains are taxed at 30 per cent. Additionally, gold held in paper form is not liable for wealth tax.

No additional fees currently apply to approved applicants who create or redeem Dubai Gold Securities.

Other than the annual management fee (currently 0.4 per cent per annum) and brokerage charges, no other fees or charges will apply to investors buying or selling Dubai Gold Securities on Nasdaq Dubai.

The Dubai Gold Securities on Nasdaq Dubai can be bought and sold through normal broking channels. These instruments trade similar to any other Nasdaq Dubai-listed security. Each Dubai gold security (DGS) represents approximately a tenth of one fine troy ounce of gold bullion. These come with a management fee of 0.40 per cent per annum that is accrued daily and is deducted from the gold backing each security and held on behalf of investors.

From Gulf News