Are Gold ETFs liquid

POSTED BY Sambaran Mitra ON November 13, 2012 4:21 pm COMMENTS (8)

Assume I have some gold-ETFs to sell. Assume that on the day of intended sale, no other person is ready to buy gold-ETF.
Will I not be able to complete the transaction in that case? Or will I get a lower price (than the market rate of gold) for the gold-ETF-units?

In other words, how does an AMC assure liquidity in case individual interest for buying ETF is absent on the day of the transaction?

8 replies on this article “Are Gold ETFs liquid”

  1. Dear Sambaran, the role of AP in a sense is to keep the price of unit of Gold ETF near to physical Gold. Sample this –

    If there are too many buyers & not enough sellers, the price of unit ‘ll go above physical gold due to this demand, in this case, AP ‘ll provide Units to sell to bring down the demand.

    In opposite case, if too many sellers are there (your original query) & not many buyers are there, this ‘ll result in drop of price of Unit. Here again AP ‘ll purchase those excess units to keep price stable.

    Hope I’m able to answer your properly.



  2. bharat shah says:

    @ Sambaran Mitra
    slightly different. as the asset i.e. gold is getting diminished by 1% per year, the next year expenses would be on diminished quantity, and not on full quantity, so it would be = 0.99^(no.of years-1) (0.99 raised to (no of years-1)) i.e. after 20 years , 100 gm gold could be@ 81.79 gm. there would be some variation, as a little asset could be in cash , and expenses are charged proportionately at lesser interval than year (may be daily). however the moot point is : as the gold etf is not earning any income, and its main assets is gold itself, your gold would diminish year by year, irrespective of physical gold price.

  3. @Bharat Shah,

    Thanks for your reply. I am trying to comprehend your point through an example. Let me know if understanding is correct.
    If I buy 100gms gold ETF, then each year 1 gm of gold is ‘lost’ due to asset-management-charges (assuming 1% AMC-charges).
    So if I hold the ETF for 20 years, my 100gms gold will become 80gms gold. Is that what you mean?

  4. @BanyanFA,
    Thanks a lot. I saw the authorised-participant (AP) term mentioned in an ETF literature but did not comprehend its role fully.
    Is the AP mandated to keep the cost of ETF within X% of the market price. If yes, what is the value of X?

  5. BanyanFA says:

    The answer to the query is both Yes and No. Gold is an actively traded commodity (unlike realestate) and hence its underlying ETF should also be actively traded. AMC’s do appoint a market maker / Authorised Participant (AP) whose primary role is to enhance liquidity and prevent a massive difference between the actual price of the commodity and the underlying ETF. If that happens, the AP would buy / sell the adequate amount of ETF units and convert them into physical gold (arbitrage opportunities). This would also result in enhancing the liquidity in the market.

    One important factor is to check the overall market Cap of the Gold ETF before entering into one. The larger the fund size, the larger would the investor base and more would be the liquidity.

  6. Thanks Manish. This ambiguous liquidity scenario is indeed a big CON for gold-ETF then. Interestingly this aspect is not mentioned much in gold-ETF advertising/discussion.
    What a put off!!

    1. bharat shah says:

      one more point , i think, one should understand. contrary to common belief, the one unit of any gold etf is not representing one gm. of gold (you check any gold etf price). in fact, as the gold etf gets older , it is representing less @rate of @1% per year by weight due to its expense ratio, irrespective of physical gold prevailing price. you can verify this fact from existing gold etfs. older would less priced, not because it is more beneficial, but it represents lesser gold.

  7. No, you will not be able to SELL them in that case . Stock market is just a place to connect buyers and sellers , people never realise these because almost never they have faced these kind of situation , hence they believe that their transaction will also go through .

    If you want to sell at Rs 100 and no one is ready to buy at Rs 100, but lets say a buyer is ready at Rs 90 . Then either of you have to budge ! ..

    Either you have to lower your price or the buyer has to move his price up . Only then the transaction will happen . If no one is ready to buy, then you will not be able to SELL at all . This is the problem with stocks with low liquidity (penny stocks generally) . Large/Mid/Small cap companies are fairly liquid most of the times.

    Gold ETF is just like share and it depends which Gold ETF are you invested in ? Some of them are quite liquid , others are not .


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