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Mutual Fund Category Analysis

Gold, Gold ETFs and Gold Funds January 06, 2012

Gold, an asset class which is neither perishable nor consumed like most other commodities, has been the bestperformer among all investment options over decades. It has consistently outperformed other traditional assetclasses such as equity, debt, currencies and other commodities irrespective of most of market and economiccycles with a compounded annual growth rate of 13% for the last ten year period. Given its special status of

universally accepted medium-of-exchange, gold has been used as the standard for many currencies in history.Gold, which has been used as a symbol for purity, value, status and royalty, has served as both a legitimatehedge against inflation and as an integral part of a diversified investment portfolio.

One of the oldest civilizations, the Sumerians of Mesopotamia, who lived in what is modern-day Iran and Iraq,first used gold as sacred, ornamental, and decorative instrument in the fifth millennium B.C.

The early Egyptians used gold primarily for personal adornment, rather than for monetary purposes, althoughthe kings of the fourth to sixth dynasties (c. 2700 - 2270 B.C.) did issue some gold coins.

The first large-scale, private issuance of pure gold coins was under King Croesus (560-546 B.C.), the ruler ofancient Lydia, modern-day western Turkey. Stamped with his royal emblem of the facing heads of a lion anda bull, these first known coins eventually became the standard of exchange for worldwide trade andcommerce.

Gold is traditionally weighed in Troy Ounces (= 31.1035 grams). It has a specific gravity of 19.3, meaning thatit is 19.3 times heavier than water.

II. History Of Gold:

I. Prologue:Gold, Gold ETFs and Gold Funds a perspective:

Weight Equivalents:


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Gold, Gold ETFs and Gold Funds contd

The major source of Gold supply is the mine production which contributes around 60% of the world supply andthe remaining supply is met through recycled gold. The total gold supply rose by just 1.7% in 2010, as a lowerlevel of scrap-gold recycling and net buying by central banks partly offset mine output growth of 3.8%. Therecycled gold supply was at 1,646 tons during last year. As of 2010, approximately 168,300 tonnes of gold havebeen mined over the course of human history. Seven countries such as China, USA, Australia, Russia, SouthAfrica, Peru and Indonesia produce more than a 1,000 tonnes of gold annually. Data for the first eight months of

2011 from the World Bureau of Metal Statistics show growth in mine production of just 2.5% YoY. Mineproduction is expected to continue to grow in 2012-13, at an annual average rate of 3%.

III. World Gold market dynamics Production & Supply:

China is the world's biggest gold producer, having raised production every year since 2004. In 2010, output was

pegged at 345 tonnes. China's gold production is expected to rise by more than 10% in 2011. During the first halfof the year, China's gold output grew by 5.18 tonnes, or 3.25% year on year to 164.42 tonnes.

In 2010 Australia produced 255 tonnes of gold and ranked as the worlds second largest gold producer. Australiahas more gold reserves than any other country and at current production rates they would last another threedecades.

The US produced 230 tonnes of gold which made it the worlds third largest gold producer. Commercial-grade

refined gold came from about 2 dozen producers. Gold production in the United States is mainly concentrated inthe states of Nevada, Alaska, Utah, and Colorado.

Sources: World Gold Council (WGC); Gold Fields Mineral Services (GFMS); Economist Intelligence Unit. * - estimated value.

World Gold Supply:


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Distribution of gold supply by category:

Distribution of mine supply by countries:

China (14%)

Australia (10%)

US (9%)

South Africa (7%)

Russia (7%)Peru (7%)

Indonesia (5%)

Ghana (4%)

Canada (4%)

Uzbekhistan (4%)

Papua New Guinea (2%)

Brazil (3%)

Mexico (2%)

Chile (2%)

Other Countries (20%)

0%

20%

40%

60%

80%

100%

1970 1980 1990 2000 2010

Mine production Net producer hedging Recycled Net central bank sales Net disinvestment

Data as of 2010


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Major demand for Gold arises from Investment demand, Jewellery demand, Government reserves & Industryapplications. In 2010, the demand for gold was strong in all the four categories and annual demand grew 9% to3,971 tones. Investment demand comprising of Gold bars, coins, ETFs and physical bar investment grew 56% lastyear.

India is world's biggest gold consumer followed by China and US. Jewellery and investment are the key areas ofIndian gold demand. In fact, gold jewellery made up about 75% of total gold demand in India in 2010.

Investment demand: Given the proven risk mitigation, hedging and safe haven properties, gold is a naturalchoice of deploying savings as investors invest in the commodity seeking protection from economic uncertainty.Gold ETFs, one of the major investment options is getting popular among investors day by day. There are otherforms of investments in gold like bars, coins, derivatives, spread betting, certificates and others. Holdings in theworlds largest gold backed ETF, Gold SPDRs was at 1280.7 tons in 2010 and had a net inflow of 147 tons.

Jewellery demand: India is the largest gold jewellery market in the world & the demand in rupee terms almostdoubled in 2010 to Rs1.342 trillion ($29.6 billion) from Rs. 669 billion in 2009.

Government reserves: As of March 2011, IMF held 2814 tons of gold & at the time of recent global recession, IMFannounced the sale of one eighth of its holdings, 200 tons of which was purchased by India. Declared andundeclared Central bank gold demand continues to be high.

Industry Applications: Golds quality of corrosion resistance, medicinal importance & resistance to extreme

temperatures is attracting increased number of usages for the yellow metal.

IV. World Gold market dynamics Demand:

World Gold Demands (tonnes):

Sources: World Gold Council.


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Distribution of gold demand by category:

World official gold holdings:

0%

10%

20%

30%40%

50%

60%

70%

80%

90%

100%

1970 1980 1990 2000 2010

Jewellery Technology Investment

8133

3401

28142452 2435

1054 1040 837 765 612 558 502 488 424 382 366 323 310

0

2000

4000

6000

8000

UnitedStates

Germany

IMF

Italy

France

China

Switzerland

Russia

Japan

Netherlands

India

ECB

BIS

Taiwan

Portugal

Venezuela

SaudiArabia

UK

Sources: World Gold Council. International Financial Statistics, December 2011.

As of November 30, 2011, Total World official Gold holding by Central Banks was at 30,732 tonnes.


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Gold Demand by Global ETFs:

Top gold backed ETFs by size:

As of June 30, 2011, the collective holding by global ETFs in gold was at 2,155 tonnes.Sources: World Gold Council. Data as of 30 Sep 2011.

0

200

400

600

800

2002 2003 2004 2005 2006 2007 2008 2009 2010

0

200

400

600

800

1,000

1,200

1,400

1,600

Gold Demand by Global ETFs (tonnes) (LHS) U$/troy oz (RHS)


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Global Facts:

Total above ground stocks of gold as of 2010 (tonnes):


Total global gold demand as of 2010 (tonnes): Total global gold supply as of 2010 (tonnes):

Mine

production

(61%)

Recycled Gold

(39%)

Jewellery 84,100 t 50%

Private Investment 31,400 t 19%

Official Holdings 29,000 t 17%

Other Fabrication 20,200 t 12%

Unaccounted 3,600 t 2%

Jewellery

(50%)

Investment -

Bar & Coin

(29%)

Investment -

ETFs (9%)

Technology

(12%)


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Global majors:

Major Exporters:

Sources: World Gold Council. Data as of Dec 2010.

Aust ralia (13%)

Canada (4 .4%)

US (17%)Indinesia (6.1%)

Peru (7.4%)

US (17%)

Australia (13%)Peru (7.4%)

Indinesia (6.1%)

Canada (4.4%)

China (15%)

Turkey (4 .5%)

India (25%)Germany (7%)

M idd le East (10%)

India (25%)

China (15%)

Middle East (10%)

Germany (7%)

Turkey (4.5%)

China (14%)

Aust ralia (10%)US (9%)

Russia (7%)

South A fr ica (7%)

China (14%)

Australia (10%)US (9%)

South Africa (7%)

Russia (7%)

China (18%)

Germany (5%)

US (9%)

M idd le East (9 %)India (25%)

India (25%)

China (18%)

US (9%)

Middle East (9%)

Germany (5%)

Major Importers: Top Consumers:

Top Producers:


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India is world's biggest gold consumer followed by China and US. Indian Households hold more than 18000 tons ofgold, the largest amount of bullion holdings in the world. Jewellery and investment are the key areas of Indiangold demand. Indias total gold demand rose to 963 tons in 2010 whereas the Jewellery demand increased to745.7 tons. In fact, gold jewellery made up about 75% of total gold demand in India in 2010.

Given high domestic inflation, gold is also be perceived as an inflation hedge by Indian consumers and investors.The gold jewellery consumption is expected to grow at an average annual rate of 7.5% in 2012-13.

Over the past few years, there has been a significant development in Indian gold ETF market though the size ofthe industry is still small as Indian investors seek greater access to more liquid gold investments. Hence ETFshave gained more popularity among them. The Indian Gold ETF industry offers 12 gold ETFs and 8 gold FoFswhose total AUM as of November 30, 2011 was at Rs. 9,568 crore.

V. Gold market in India:

0

200

400

600

800

1000

1200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Other sources

Recycled gold

Net Imports

India gold demand in tonnes: India gold supply as on 2010 (tonnes):


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Jewellery: Jewellery is one of the major demand factor for the yellow metal and the demand comes mainly fromIndia & China who contribute more than 50% of the world jewellery demand.

Technology: The increased usage of gold in technology is because of its qualities such as corrosion resistance(which means protecting the part from becoming rusty), good conductor of electricity which is used in

microchips & electronic appliances for connecting. Gold is widely used as connectors & wires in variouselectronic items as its reliability is high.

Medicine: Golds medicinal importance has been researched many centuries ago & Chinese and Indian people usegold for the medicinal purposes. Chinese many years ago started using Gold as an important part of themedicines they prepare for small pox, because of the resistance power & the power to protect against bacteriaand to protect from skin allergies. In the US, gold had been known for improving heart and improved bloodcirculation. Gold has also been used to cure cancers.

Nanotechnology: Gold nowadays is used as catalyst and the gold nano particles have been efficient absorbers ofmercury from the water and act as purifiers. Gold has infrared shielding capacity and it has prompted manybuilders to use it in the exteriors windows, which reduce the heat getting inside the building. Adding a gold nanorod to the memory sticks or optical drives can significantly increase the storage capacity, according to research.

Space & engineering: Gold has many important qualities such as good reflector of heat & infrared radiation. Gold

coating is applied on various items used in space to protect against various radiations that occur. Goldsresistance to extreme temperatures and corrosion resistance are attracting more engineering uses and thedemand is increasing. A gold coating on windows provides protection against extreme temperatures.

Dental Industry: Gold in recent years has been used extensively in dental applications, due to its resistance tocorrosion and is not harmful when it comes into contact with body. Setting up of golden tooth is one of themajor uses in the dental industry & seen as a status symbol.

VI. Applications of Gold:



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High Inflation: During high inflation, investors tend to invest in gold as it is seen as a good hedge againstinflation. Rising inflation appreciates gold prices as people start investing in the yellow metal.

Interest rates: The demand for gold increases when the interest rates trend down. Lowering interest ratesincreases gold prices as gold becomes a better investment option vis-a-vis debt products that earn lowerinterest. Vice versa, peoples tend to keep money in deposit compared to gold when interest rates rise.

Weakness in other asset classes and lack of safe havens: When the economy and financial markets do not dowell, gold investments can provide a good hedge for investment portfolio. Gold is negatively co-related to mostof asset classes.

Decline of Mine production and Supply: Gold mining and production have been decreasing in the recent periodswhile there is an increase in the demand for gold. An increase in the cost of mining, strikes by gold miners, legalformalities, geographical problems and worsening political situation have led to a fall in gold mining.

Demand and supply factors: A change in supply could alter the price of gold. If there is a sharp increase inproduction, its price is likely to fall. On the other hand the fluctuations in price tend to occur due to changes indemand.

Central bank demand: With dollar facing a question mark as regards its value, central banks of most of thedeveloped countries have started to increase their share of gold in forex reserves. At stable/peaceful /economic

prosperity times, Central banks may prefer bonds to gold as bonds fetches some interest.Changes in exchange rates: Weaker U.S. dollar usually leads to an increase in world gold prices. This is becauseinvestors choose to sell their dollar and buy gold with the hope that gold can protect the value of their dollarassets.

Geo political and economical concerns: Whenever there is uncertainty prevailing in the globe, the prices of goldshoot up. In the recent financial crisis the gold prices were in uptrend.

VII. Factors influencing gold prices:



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Economic data: The macro economic data such as unemployment data, GDP numbers & Home sales also impactgold prices. When the economy is growing, investors will move the funds from safe assets to the riskier assets,which give higher returns.

Speculation: Like any commodity, investors can be caught up in the mood and expectations of the moment.Rising gold prices can become self-fulfilling prophecy as investors pile into gold to take advantage of risingprices. The price of gold can be highly volatile.

Other factors such as demand for jewellery, changing government policies, government borrowing, sentiment,liquidity, safe Haven Buying, manipulation, Rising population affect the price for gold.

VIII. Interactive gold price chart:Currency: USD. Weight: Oz.

0

500

1,000

1,500

2,000

Dec-78

Dec-80

Dec-82

Dec-84

Dec-86

Dec-88

Dec-90

Dec-92

Dec-94

Dec-96

Dec-98

Dec-00

Dec-02

Dec-04

Dec-06

Dec-08

Dec-10




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Jewellery: Investing in jewellery may not be considered as investment as jewellery is generally not made from24 carat gold; it is generally made from 22 carat or 18 carat gold since 24-carat gold is brittle and cannot be setto beautiful designs of jewellery. Investors have to pay for the making charges and wastages. When liquidated,the making charges, impurities and wastage will be cut and investors may end up getting less than what hadinvested.

Gold bars or coins: Government-certified gold coins or bars have purity level of close to 99.9 and they can besold easily. Banks charge extra for their coins of anywhere between 5% and 10%. Also the bank coins have lesserliquidity as they are not bought back by the banks.

World Gold Council coins are coins issued by jewelers who are part of the WGC network. They have lesserpremium over the market price (1% to 2%) and are redeemed at the market price when one takes them forselling. Bullion bars are good modes for investment but the minimum investment is much higher.

Gold certificates. is a certificate which represents ownership of gold bullion held by a financial institution forconvenient and safe storage. There is a fee for storage and insurance.

E gold: National Spot Exchange Limited (NSEL), India is offering E-series to invest in gold. Retail investor cantrade in commodities especially precious metal like gold in e-form. Like equities one can keep their gold indemat form, which not only saves on insurance cost and locker rent but also one can invest in smalldenominations

Gold Exchange Traded Funds: They are mutual fund schemes, listed on the stock exchanges and traded likeshares. The pooled amount is invested in the physical gold. When redeeming the units, investor can go to thefund house or sell in the market and get them converted in to cash. Gold ETFs are proving to be an easier andsafer mode to buy gold. The charges are very less and the gold can be accessed electronically. Mutual fundsfurther offer gold fund of funds in which investors can invest as much small amount as Rs. 100 every month.

Gold Mutual Funds: Gold mutual funds hold portfolios of gold mining companies and are directly linked to goldprices. They are actively managed as they are handled by the fund managers.

IX. Options for Gold Investment:



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Gold is a metal, which is valued and traded in all the countries of the world. Gold is the most liquid asset inthe world.

An investment portfolio with an allocation to gold improves the consistency of the portfolio making it strongand stable. Gold provides consistent appreciation on a continuous basis.

Gold has a low correlation with major indices/most other asset classes and hence is a good portfolio

diversifier. Ideally Gold should constitute 8-12% of ones portfolio on a continuing basis.

Gold is a good tactical hedge against inflation. It has outperformed the consumer price index 8 times out of10 in the last ten years.

Gold is used to hedge currency exposure. It has been a part of portfolios since ancient times to guard againsteconomic pitfalls or disasters.

Gold act as a safe haven during economic crisis and market downturns. The price of gold is not linked to theperformance of an economy, industry or company. Its appreciation in not affected by market volatility.

X. Why should an investor invest in gold?

Gold as an inflation hedge:

0%

10%

20%

30%

40%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

CPI Inflation Performance of Gold


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Gold as safe haven during crisis:

-60%

-30%

0%

30%

60%

Dotcom Bubble (Jan'00-May'02) Unexpected Election (Apr'04-

Jun'04)

Heavy selling by FIIs & DIIs

(Mar 06 to Jun 06)

Credit Crisis I (Dec'07-May'09) Credit Crisis II (Nov10-Aug'11)

Nifty MSCI w orld Gold Returns

Gold as consistent performer in terms of annual returns:


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Gold ETFs are passively managed mutual fund schemes investing in standard gold bullion having 99.5% purity.They are listed on the stock exchanges for trading with an intention to offer investors a means of participating inthe gold bullion market without the necessity of taking physical delivery of gold. They are designed to providereturns that closely correspond to the returns provided by domestic price of Gold.

XI. Gold ETF:

XII. Gold ETFs History:

Globally, In May 2003 the first Gold Bullion Security was launched in Australia.

In Nov 2004 the Worlds 1st Gold ETF Street Tracks Gold Trust was launched.

Benchmark Mutual Fund was the first AMC to launch a Gold ETF in India - Gold BeEs in February 2007.

As of today, 12 fund houses have launched Gold ETFs.

The AUM of the category witnessed increasing substantially from Rs.96 Crores in March 2007 to Rs.9,568 Croresin November 2011, representing 1% of the mutual fund industry AUM.

XIII. Features of Gold ETFs:

Investors can buy and sell the units of Gold ETF directly on the stock exchange through a SEBI registered broker.

They are held in the demat form just like equities.

Gold ETFs give an opportunity to investor to invest in standard gold bullion (0.995 purity) without takingphysical delivery of gold nor compromising with its quality.

A custodian is appointed by the mutual fund company for safe keeping of the gold bought on behalf of theinvestors.

There is no entry/exit load charged by the fund.

The total expense ratio will be a maximum of 1% per annum.These will not be liable to wealth tax.


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Net turnover in gold ETFs on NSE:

Correlation between net inflow in gold ETFs Vs. Sensex:

0

15000

30000

45000

Nov-07

Jan-08

Mar-08

May-08

Jun-08

Aug-08

Oct-08

Dec-08

Jan-09

Mar-09

May-09

Jul-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

May-10

Jul-10

Sep-10

Oct-10

Dec-10

Feb-11

Apr-11

May-11

Jul-11

Sep-11

Nov-11

Net Turnover on NSE (Rs in Laks)

-200

100

400

700

1000

Apr-0

8

Jun-08

Aug-0

8

Oct-08

Dec-08

Feb-09

Apr-0

9

Jun-09

Aug-0

9

Oct-09

Dec-09

Feb-10

Apr-1

0

Jun-10

Aug-1

0

Oct-10

Dec-10

Feb-11

Apr-1

1

Jun-11

Aug-1

1

Oct-11

6000

8000

10000

12000

14000

16000

18000

20000

22000

Inflows into Gold ETFs Sensex


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Gold Fund of Funds (FoF) are mutual fund schemes (not an ETF) investing primarily in units of gold ETFs. Theyseek to provide returns that closely correspond to returns provided by the Gold ETF. They are passively managedfunds which enable an investor to save in the form of gold in a convenient manner either through lump suminvestment or through SIP (Minimum of Rs.100 per month). The face value of the gold funds is at Rs. 10.

XIV. Gold Funds (FoF):

XV. Features of Gold Fund (FoF):

Demat account not mandatory: Investors can invest in gold funds through the regular process of subscription i.e.in physical mode. The subscription through demat mode is an option for the investor but not a mandatory toinvest in gold fund. Demat is compulsory in case of gold ETF investment.

Cost Effective: Investing in physical mode enables you to invest at a lower cost as the investor does not have toincur the charges for the demat account and brokerage.

Liquidity: Investor can subscribe or redeem the units on all business days directly with the Fund.

The face value of the gold funds is at Rs. 10. Exit load is charged between 1% to 2% by all gold funds. Apart fromthe expenses of Gold Funds, they also bear the expenses of the underlying schemes in which the scheme makesinvestment.

Comparison among gold ETF, Gold fund, Jeweller and Bank:


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Performance of Gold ETFs and Gold Funds:

Note: Trailing Returns up to 1 year are absolute and over 1 year are CAGR. NAV/index values are as on Dec 30, 2011.


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XVI. How gold ETFs work?

Primary marketPrimary market Secondary marketSecondary market

SellerSeller

CashCash ETF UnitsETF Units

AuthorizedAuthorized

Participants /Participants /

FIFI

Buy / sellBuy / sell

MarketMarket making /making /ArbitrageArbitrage

Stock ExchangeStock Exchange

CashCash ETF UnitsETF Units

BuyerBuyer

RedemptionRedemptioninin--kindkind

CreationCreationinin--kindkind

FundFund


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XVII. Tracking Error:

Investors in an ETF are buying or selling a security representing shares in the underlying index fund. They doexpect the price of the ETF to closely track the value of the underlying Index. They also want a sense of howclosely the ETF returns correlate with those of the index. Tracking error helps out the investors to measure howclosely the ETF tracks the underling index.

Tracking error is a statistical term commonly used to describe the volatility of returns of a ETF relative to the

returns of its benchmark index. It is typically expressed in terms of the standard deviation of the differencesbetween ETF and index returns over a specific horizon. It can be interpreted as the range around the indexreturn in which ETF returns are expected to fall. For example, a tracking error of 1% implies that if the indexreturn is 10%, the ETF return should be 9%-11% about 68% of the time.

Tracking Error tells how much an ETF's returns deviate from the benchmark index's returns over any given periodof time. An ETF fund manager needs to calculate his tracking error on a daily basis especially if it is open-endedfund. Lower the tracking error, closer are the returns of the fund to that of the target Index. For investors pointof view, the lower the tracking error, the better is the ETF.

XVIII. Tax implications on Gold ETFs:

Bid ask Spread: An ideal gold ETF has a low bid/ask spread. Bid means the investor should know the price atwhich he can buy units and ask means he should know the price at which he can sell units. The differencebetween bid and ask should be very little, in an ETF.

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XIX. Advantages of Gold ETFs:

ETFs have more advantages compared to actively managed funds. They are as follows;

Small denomination: Retail investors, who want exposure to gold in small amounts, can opt for Gold ETFs. Itallows investors to buy one unit, which is buying 0.5 - 1 gram of gold depending on the scheme.

Liquidity: Gold ETFs are can be bought and sold any time during the trading hours like equities at the pricequoted on the exchange. This makes it a liquid investment instrument.

Transparent Pricing: The price of ETFs is quoted on the stock exchange and there is a bid/ask during markethours enabling you to buy/sell at market prices. Thus you do not have to pay a premium while you purchase or asell at a discount as in the case of jewellery or even sometimes coins and bars.

Safety: Gold ETFs is essentially buying gold in paper form. So the investor does not have to take the trouble ofsafe keeping of the gold. The custodian appointed by the mutual fund has the responsibility of taking care of thegold.

Purity: Mutual funds are governed by SEBI and SEBI regulations require the purity of underlying gold in Gold ETFsto be 99.5% fineness and above. This spares investors the trouble of finding a reliable source to buy gold.

Tax Efficient: Gold ETFs do not attract wealth tax. Besides, the investment is categorized as long term if it heldfor more than a year unlike physical gold where the period is 3 years.

XX. Disadvantages of Gold ETFs:

Demat account: Demat account and brokers accounts are mandatory for an investor to participate in the goldETF trading as they are traded in stock exchanges. However, no demat and broker accounts are necessary in caseof gold funds transactions.

Brokerage Charges: The brokerage charges need to be paid when trading in ETFs. It can be minimized by trading

less but the very charm of ETFs is destroyed because it is meant for being traded more often than an index fund.

On the downside, there are some disadvantages also associated with ETFs.

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SIP in ETF is not applicable in ETFs. But gold funds provide the facility to invest through SIP with minimumamount of Rs. 100.

True Replication: The ETFs may not replicate the returns of underlying index due to management expenses, cashholding and so on which result in higher tracking error.

XXI. FAQs on Gold ETFs:

Why NAVs of Gold ETF schemes from different sponsors are different? Why do Gold ETFs quote at a discountto spot gold price?

The NAVs of Gold Exchange Traded Funds from different sponsors vary from each other as they have beenlaunched in different time periods. The issue price for per unit was fixed during NFO period based on the spotprice of one gram of gold prevailing on the date of allotment (this date generally falls in fifteen to 30 days afterthe NFO is over).

NAVs of such funds appreciate or depreciate by tracking closely the underlying benchmark of price of physicalgold in the conventional market place. As the investment style is passive in nature, the returns are more or lesssimilar to that of physical gold.

Importantly, the ETFs do invest a very small part of their corpus in short term debt instruments such as callmoney and keep it as cash equivalent to maintain liquidity and to meet redemption requirements.

All AMCs charge expenses to the schemes. Such expenses are 1% for all schemes except Birla SL Gold ETF(1.44%). As Gold ETFs are not allowed to earn money by pledging/loaning the Gold, they are unable to recoverthe expenses from any source. Hence as years pass by the NAVs of ETF will dip by the expenses charged to thescheme and get further away from the spot price of gold. So an older ETF will display a higher discount to thespot price.

However for a new investor it does not make a difference as to whether he invests in scheme A at a higher NAV

of scheme B at a lower NAV. He will typically participate in the upside/downside in line with the price of gold inequal proportions.

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The following table displays the above facts:

Why do Gold ETFs quote in the market at a discount to their NAVs?

Gold ETFs are can be bought and sold any time during the trading hours like equities at the price quoted on theexchange (NSE and BSE). The AMCs typically appoint certain brokers as Authorized Participants/Market makers toprovide continues liquidity. However the actual liquidity and depth depends on the seriousness with which theseplayers do their duties. Illiquidity in wake of lack of buyers/sellers in the market could lead the price of ETF to

quote at a discount to their NAVs. This is more the case when there is a sharp rise or fall in gold price in a smallperiod of time.

Is Corpus of a Gold ETF important or relevant? Is the movement of corpus over time important?

AUM of Gold ETF category has grown remarkably from Rs.96 Crores in March 2007 to Rs.9,568 Crores inNovember 2011. Part of this reason could be rise in gold prices. In case of schemes that show consistent rise in

corpus (say like Gold BeES), the liquidity in the market improves with the passage of time.

Note: Trailing Returns up to 1 year are absolute and over 1 year are CAGR. NAV/index values are as on Dec 30, 2011.

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Why is Reliance Gold ETF NAV quoting at a steeper discount to the spot price than others?

One probable reason for the 5.9% discount of Reliance Gold ETFs NAV to spot gold price could be that during theinitial days Reliance Gold ETF allowed facility of creation/redemption of units in creation unit size to largeinvestors (in addition to Authorised Participants allowed by all Gold ETFs). This facility resulted in the AMCbearing some losses. Subsequently this facility was withdrawn for large investors in February 2009. In themeanwhile its NAV dipped due to this.

Discount of NAV of RELGOLD to spot price since inception

-5%

-2%

1%

4%

7%

10%

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

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M t l F d C t A l i


HDFC Securities Limited, I Think Techno Campus, Bulding B, Alpha, Office Floor 8, Near Kanjurmarg Station,Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone (022) 30753400 Fax: (022) 30753435

Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation.This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or asolicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate orcomplete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referredto herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in thisdocument. This report is intended for Non-Institutional Clients

(Database sources: World Gold Council, AMC Sites, NAVIndia, Ace MF & Newspaper reports)

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