All that glitters is not gold but from Monday, investors will feel the reverse of this saying as Kenya ushers in the gold-backed investments at the Nairobi Securities Exchange, known as Gold ETFs. Investors will be able to buy units of assets secured by gold for just about Ksh1,200, according to a report by Business Daily, which will kick off the trading of exchange traded funds (ETF) in the country
The ETF is being issued by South African firm NewGold Issuer Limited, which said it will use the proceeds of the issue to buy gold bullion that will back the securities.
The ETF’s pricing is based on real time price of gold in international markets — where one unit is pegged on the price of a troy ounce of gold — and the prevailing shilling/dollar exchange rate. Gold backed Exchange Traded Funds (ETFs) are designed accurately to track the price of gold.
On Thursday, gold retailed in the international markets at $1,249.30 (Sh128,540) per 100 troy ounces, meaning an ounce would be equivalent to Ksh1,285. At a minimum traded amount of 100 units that the NSE rules have set, you would need to fork out at least Sh120,000 to access the ETFs, potentially locking out many retail investors.
“The price means that it is likely to be marketed to institutional investors rather than retail buyers. Asset managers sitting on huge capital now have an additional asset class to invest, one that they can use as a safe haven for their assets in case of market shocks,” ABC capital analyst Raymond Kipchumba told Business Daily.
In the Johannesburg Stock Exchange, where the ETF had its primary listing in 2004, a unit sold at an average of 149 Rand or Ksh1,209 this week.
An ETF is a fund into which investors contribute money that goes into buying securities that make an index or a defined group of securities — such as banking or insurance stocks — put together. The underlying asset can also be a commodity, such as gold. The investors do not own the commodity directly, but instead hold shares in the ETF whose value goes up or down in tandem with the value of the underlying asset.
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NewGold Plans to use the proceeds of the NSE ETF issue to buy gold bullion, and is issuing its securities as debentures. The issue has opened the door to local investors wishing to participate in the gold market, where they have previously had to either trade in the commodity in its physical form (bullion) or do so through offshore markets.
Hedge against inflation
It also used as a hedge against inflation, given that the pricing takes into account fluctuations of exchange rate and the asset is valued in dollars. “The currency aspect makes it a risk mitigant of sorts, hedging against inflation and depreciation. The instrument has also come into the market at a good time, given that the country is looking at election risk and the market needed a new product to re-energise investors,” said Mr Kipchumba.
Gold commodity exchange traded funds are a simple way to expose your investment strategy to the performance of gold, without actually owning any gold products. There are many types of gold ETFs, some of which consist of futures and derivative contracts in order to track the price of gold and gold-related indexes, while others consist of gold assets held in a trust. There are even gold ETFs that track companies in the gold industry.
For example, one of the most popular gold ETFs is GLD, the SPDR Gold Shares ETF. In the case of the SPDR gold ETF, you do not actually own the gold assets, they are held by a Trust. The Trust issues baskets in exchange for deposits of gold for when the baskets are redeemed. So, you have exposure to the price of gold, but don’t have a pile of gold coins sitting under your desk.