It is a good idea to know the origin of gold ETFs (Exchange traded Funds) as that helps to understand what they are and their place in the gold world.
Gold EFTs are a way of purchasing gold for investment purposes and have some advantages over other forms of gold ownership.
Gold exchange-traded funds (or GETFs) are special types of exchange-traded funds (ETFs) tracking the price of gold. Gold exchange-traded funds are traded on the major stock exchanges including London, Paris and New York.
According to Wikipedia, "exchange-traded funds (or ETFs) are what you might call open ended mutual funds that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the S&P 500 (IVV) or the Hang Seng Index, a market sector such as energy or technology, or a commodity such as gold or petroleum; However, as ETFs proliferated in 2006 from under one hundred in number to almost four hundred by the end of the year, the trend has been away from these simpler index-tracking funds to intellidexes and other proprietary groupings of stocks."
The legal structure of EFTs tends to vary around the world but the common features such as being an exchange listing with the ability to trade continually and being are index-linked rather than actively managed continue to exist.
The idea of a gold ETF was first officially launched by a company called Benchmark Asset Management in India. They filed a proposal with the Securities & Exchange board of India (SEBI) in May 2002. It was not launched at that time however, since it did not receive regulatory approval.
The first gold exchange-traded fund was actually launched in March 2003 on the Australian Stock Exchange under Gold Bullion Securities (ticker symbol "GOLD"). Gold Bullion Securities (GBS) are fully backed by gold which is both deposited and insured. GBS was launched to give financial institutions and private investors the ability to own gold and gain exposure to the price, without the inconvenience of storing physical bars.
Gold ETFs are backed by physical gold stored in a vault. Investors can buy a share that says they own an interest in the gold to the value purchased. The EFT's custodians create or redeem blocks of shares based on market demand for the ETF. When demand for the ETF shares is high and exceeds the current stocks of gold, more gold needs to be put in the vault to back the newly created shares so under this scenario, the ETF would take gold off the open market. With the volume of gold now traded as EFT this can contribute to the value of gold increasing as less of it becomes mobile.
Experts and traders alike promote the ease of trading in gold ETFs and electronic forms of owning gold. It has become the lazy gold investors tool. No requirements for delivery, storage or resale. No security risks as the gold remains safely deposited in bank vaults around the world and even when the ownership of any portion of that gold changes, the gold itself does not physically move.
"These funds do not have to hold gold-mining shares, but gold itself," Julian Phillips, an analyst at GoldForecaster.com once explained. That impacts the gold price directly, "whereas the gold-mining shares never did," he said.
The original idea of gold EFTs may have came out of India, one of the leading users of gold. But it was the west that took it up with a vengeance!