An Amrita paper titled Gold ETF Performance: A Comparative Analysis of Monthly Returns was recently published in the IUP Journal of Financial Risk Management.

This journal of the ICFAI University Press (IUP) enjoys a large subscription base among academic and financial industry professionals in India.

The paper was co-authored by Sougata Ray, Assistant Professor, Amrita School of Business, Amritapuri campus and recent Amrita MBA graduates, Mukesh Kumar Mukul and Vikrant Kumar.

“Gold is considered as a long-term investment option associated with very low risk. Investors across the world have been investing in gold primarily because there is a mismatch between its demand and supply. The demand for gold is much higher compared to its supply,” the co-authors stated in their paper.

It is in this scenario that the Gold ETF (Exchange Traded Fund) assumes its importance. The fund closely tracks the prize of physical gold. Owning units of the fund is like owning gold, except that the units can be bought and sold in the stock market.

The funds were introduced in the market only a few years ago. The Amrita paper attempted to find out whether or not such funds provid an attractive option for investment. The co-authors analyzed market data during the period January 2010 – August 2011 and tracked fund performance.

“During the period of study, gold investment gave a better monthly return as compared to a diversified equity fund. In terms of portfolio performance measure, we find that gold investment has performed better,” the authors reported.

Elaborating on some unusual relationships they discovered while studying the market data, they added, “The most interesting aspect of our analysis is that gold investment has a negative co-relation with equity investment, and therefore can act as a perfect instrument for hedging equity investment risk.”

In other words and generally speaking, when the stock market goes down, the price of gold and consequently the value of the Gold ETF goes up.

The editorial note in the journal corroborated the findings in the paper.

“Investors should have a certain portion of their investment in gold. A gold ETF or gold mutual fund is an ideal instrument for investment. Features like high liquidity and transactional ease further make the case for gold ETF investment stronger,” wrote Nupun Pavan Bang, Consulting Editor.

July 7, 2012
School of Business, Amritapuri