Tuesday, February 14, 2012

Investment Notebook 2011: Gold ETF

Below is an article on gold ETF extracted from SGX published in 2011:

1) SPDR Gold Shares® (GLD) ETF participation has increased in August on account of the volatility that has coincided with Standard & Poor’s downgrading the credit rating of the United States to AA+ from AAA.

2) Unlike Gold Futures, the GLD ETFs do not extend leverage to the ETF buyer and sellers.

3) In Asia, the GLD ETF is cross-listed in SGX, Hong Kong and Japan. SGX maintains the largest market share of GLD with over 53% of Asia volume transacted on SGX.

4) Spread-wise, the GLD ETF has the most competitive average spread of 9.487 bps where the average spread of GLD in HK and Japan are 12 bps and 11 bps over the past one week.

SGX currently lists 84 Exchange Traded Funds (ETFs) that cater for a number of assets, investment strategies and risk appetites. The events of August have seen participation growth in the SPDR Gold Shares® (GLD) ETF that has coincided with the rising price of gold that reached a new high as measured by the London Gold AM Fix closure of US$1786 on 11 August.

The GLD ETF is a cash-based ETF, implying that the ETF is investing into the actual basket of constituent stocks that the ETF is tracking against the benchmark index. In its thematic research paper entitled “Gold: hedging against tail risk”, the World Gold Council WGC) argues that Gold can be used to manage risk in a portfolio in certain circumstances. In the report, tail risk is defined as infrequent or unlikely events that have consequential negative effects on an investor’s portfolio when they occur.

While the study is of interest, markets are dynamic and characteristics can change. Investors should appreciate that the price of gold can be subject to sudden upside and downside moves, and that past results do not guarantee future performance. Investors must be comfortable with market risks before participating in this market.

Magically yours

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