As more and more investors discover the fact that both TIPS and vanilla Treasuries are earning negative real interest, I believe the trickle of outflows from bonds to precious metals will soar.
Gold ETFs are like private central banks, and they have performed fabulously well as more and more investors search for a store of value free from central bank manipulation. USD and sterling are out; the euro’s value is politically and economically unsustainable. That basically leaves gold.
The HSBC ETF issues ten new shares for every additional ounce of acquired gold. Its daily turnover — 8 million shares per day — exceeds that of Google. Its gold reserves (628 metric tons, or 691 standard tons) are larger than those of the People’s Bank of China or the European Central Bank.
Peter A. McKay and Diya Gullapalli | January 07, 2008
GOLD’S place in the financial system dates back centuries, but it is enjoying a modern-day renaissance, thanks in part to new vehicles that allow investors to buy and sell the precious metal as easily as a share of Google stock.
The price of gold fell $US3.30, or 0.4 per cent, to $US863.10 a troy ounce on the New York Mercantile Exchange’s Comex division on Friday, but that was after hitting a 28-year high earlier in the week. It is now up 43 per cent from a year ago. Investors have been flocking to it as the outlook for more conventional investments like stocks and bonds becomes cloudier. Analysts point to the introduction of exchange-traded funds (ETFs) linked to gold as a potent new catalyst for interest in the yellow metal. ETFs trade on exchanges like stocks, but their performance can be tied to almost anything, from the value of commodities to the performance of stock indexes such as the S&P 500 index or Dow Jones Industrial Average.
The most active gold ETF – called streetTRACKS Gold Shares, trading under the ticker GLD – now averages about 8million shares a day in turnover, more even than Google’s shares, which change hands less than 7million times a day on average. GLD’s underlying holdings of the precious metal are greater than the European Central Bank’s or China’s central bank.
Demand from investors is driving the price of gold higher, even though demand for the metal for things such as jewellery is surprisingly soft.
“The single most important thing to understand about the gold price is that it’s being driven higher by investment,” said CPM Group managing director Jeffrey Christian, from the commodity-focused financial-services firm in New York.
“That investment demand has been pretty broad-based around the world, and it doesn’t look like it’s close to ending.”
Since early 2003, at least eight gold-related ETFs have been listed worldwide. Similar ETF offerings have also cropped up formetals such as silver and platinum.
Most of these offerings require that each ETF share purchased by investors be backed up by actual metal held in a trust by the ETF issuer, usually a bank or other financial firm. The biggest is the streetTRACKS Gold Shares ETF, sponsored by the World Gold Council, a mining-industry group. Its holdings are valued at more than $US16.8 billion ($19.1 billion), more than the valuation of General Motors.
Each share in GLD is backed by about 1/10 of an ounce of metal held in vaults in London by HSBC Bank USA, a unit of HSBC Holdings.
The streetTRACKS ETF issues more shares as brokers see more demand in the market, and brokers receive shares for the metal they buy and transfer to the fund.
The fund sat on about 628 metric tonnes of gold last month, according to the World Gold Council, more than the 600 or so metric tonnes in Chinese central bank reserves and 604 metric tonnes with the European Central Bank. In all, the eight ETFs held 834 metric tonnes of gold through November, according to the World Gold Council.
According to CPM, gold demand among private investors prospecting for returns has nearly doubled to more than 40 million ounces a year since the end of 2001. By contrast, global demand for gold to make jewellery and other items has fallen nearly 13per cent during the period. Gold’s price in the period more than tripled.