Performance and Price Discovery of Gold Exchange Traded Funds

Unlike US market, the Indian gold market consumption is very voluminous and hence the gold ETFs may not serve as a price discovery vehicle. We examine the performance and pricing behaviour of US listed and Indian gold Exchange Traded Funds (ETFs). We find that Pricing Deviation is significant for gold ETFs listed in US and India but Tracking Error to be minimal and not significant for both the US listed and Indian gold ETFs. The analysis shows that there is ample evidence to suggest that unidirectional causality exists between US listed gold ETFs and spot prices of gold and it is the ETFs that are playing the price discovery role in US market. Whereas, the analysis shows that bidirectional causality exists between Indian gold ETFs and MCX spot prices of gold. The variance decomposition analysis shows information share of US listed gold ETFs is around 45% while it is only around 1.3% for Indian gold ETFs and most of the variance is explained by the spot prices of gold in India, particularly because of the high volume of traded in spot gold market.