There is a lot of interest in gold ETFs and other such proxies of gold, and I think a large part of it is the convenience that comes along with buying assets electronically.
However, when you buy something which is a proxy of something else, you pay for transaction costs, and start losing control on how much you gain (or even lose) by the price movement of the underlying asset. This is something you should think about when planning to buy paper assets.
To me, if someone wants to go long gold – buying gold coins is the best option. Most of you will have bank lockers where you can keep gold coins secure, and they don’t cost a lot anyway. I checked the rate today and a 2 gram gold coin from SBI costs about Rs.3,760. When you buy gold coins – you cut all the middlemen and buy the asset that you really want.
As opposed to this, if you buy a gold ETF, then the following factors will affect you and eat into your returns:
- Brokerage commissions of your stock trader.
- Demat fees (you might be paying this already, so this might not be a big deal)
- Expenses charged by the ETF provider.
- Difference between the underlying value of the ETF and the price at which it is quoted at the stock exchange.
In addition to this the ETF may not have sufficient liquidity and give you headaches while trying to sell it.
If you buy a fund of funds that invests in a gold ETF, then you expose yourself to all the factors listed above, and in addition to that you may have to pay the expenses of the fund of funds. They may not hold 100% of the ETF, so the fund will not track the underlying ETF completely, and in turn track gold prices even less.
Try to go to the source, and cut the middlemen as frequently as possible.