Gold prices were often in the news this year due to its upward movements. However, investors who wanted to piggyback on the firm trend should have chosen global gold funds rather than the gold ETFs.
Funds that invest in gold mining stocks (which underperformed gold ETFs in 2008) staged a sharp recovery in 2009. The rebound in world equity markets and safe-haven buying in gold led by dollar's value depreciation fuelled the run-ups in gold stocks.
Since December-end last year, DSP BlackRock World Gold Fund has delivered a 37 per cent return and AIG World Gold Fund a 48 per cent return, rallying far past their benchmark – FTSE Gold Mines index. The interesting sidelight here is that the rally in frontline gold mining stocks such as Barrick Gold, Newcrest Mining, Lihir Gold and Gold Corp weren't all that high.
However, gold funds have staged a strong performance on the back of smaller mid-cap gold miners such as Keegan Resources, Evolving Gold, Hochschild Mining and Petropavlovsk Plc, which have seen prices more than double this year.
The stocks of gold miners benefited from an improving earnings outlook. With gold seeing a 28 per cent appreciation in price – from $866/ounce in December-end last year to $1082/ounce now – their realisations improved. The commodity price correction also aided costs.
Gold itself managed a strong performance with help from fundamental factors. There was investment-led demand for gold following the weakness in dollar (the US dollar index is down 3.8 per cent this year).
The holdings of the US SPDR gold trust, the world's largest gold backed ETF has gone up by 45 per cent this year. In 2008, this fund's holdings had gone up by a smaller 24 per cent.
The trend of central banks turning from net sellers of gold to buyers, also aided gold's price rise.
For domestic investors, listed Gold ETFs have delivered a 23 per cent return this year, in-line with the domestic gold prices that moved from Rs 13445/10 gram to Rs 16500/10 gm.
Gold's rally in rupee terms was restricted by the currency's appreciation against the dollar. In the domestic context too retail jewellery demand had been subdued this year, but gold ETFs saw some good inflows.