The rise of bullion funds
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LONDON: Bullion exchange traded funds (ETFs) are flourishing and expanding, and the market liquidity problems some had expected to be created by these new investment products have not materialised, analysts said.
ETFs had helped to widen the bullion market by attracting retail investors who used to be reluctant to trade in commodities, and had accumulated more than 600 tonnes of gold and about 3,500 tonnes of silver so far.
“It has been a fantastic success. It has definitely widened the market … but other markets such as futures markets don’t seem to have lost any business,” said Jeremy East, head of metals trading at Standard Chartered bank.
ETFs allow investors to gain exposure to commodity markets without worrying about setting up futures trading accounts or taking physical delivery.
Sponsors of such funds buy a matching amount of the commodity from the market to keep in bank vaults.
There are some 10 bullion ETFs in countries including the United States, the UK, Australia, Turkey, Singapore and South Africa.
ETFs are listed on stock exchanges and track spot prices.
Analysts said gold ETFs had attracted investors this year because of strong prices, which hit a 26-year high of $730 an ounce in mid-May.
Since then prices had dropped, with gold quoted around $627 yesterday.
But Stuart Thomas, managing director of World Gold Trust Services, sponsor of US-based StreetTRACKS Gold Shares, said ETFs were not going to lose investments.
“If your argument is that the only thing people are chasing is the price performance, then you should have seen a dramatic decrease in the assets in the trust when prices were falling.”
That had not happened, which suggested investors were seeking long-term gains from ETFs, Thomas said.
After surging in May, gold tumbled 25 per cent to $543 in one month. During that period, gold held by StreetTRACKS, accounting for about 75pc of the metal held by all gold securities, rose 0.5pc to 355.50 tonnes. The figure is now 450 tonnes.
Ross Norman, analyst at TheBullionDesk.com, said ETFs attracted investors who did not understand futures or spot markets but were comfortable in investing in stock markets.
“It gives them the ability to trade something in a way they understand,” he said.
Historically, the logistics and costs of buying, storing and insuring gold have kept some institutional and retail investors away from the bullion market.
“ETFs are remarkably sticky. The money comes in and then doesn’t seem to leave. It tells you that they must be different types of investors,” said David Holmes, director of precious metals sales at Dresdner Kleinwort.
ETFs had raised concerns that a significant portion of gold and silver would be taken out of the supply chain.
But Simon Weeks, director of bullion trading, ScotiaMocatta, said the metal held by all the gold funds combined was still too little to for the sector to have a big and sustained influence over prices.
Silver prices hit a 25-year high of $15.17 an ounce in May after the launch of a silver ETF by Barclays Global Investors, while platinum surged to a record high of $1,395 last month on talk that an ETF was likely to be introduced.
But silver was trading at around $13.68 an ounce on Friday, while platinum has fallen to $1,105 an ounce.
The silver ETF has accumulated 112 million ounces (3,489 tonnes) of metal, about 17pc of annual mine output.
“At this rate it will take a year or two for the ETF to get up to the 200 million ounce level, at which we believe the silver market will start to materially tighten,” said John Reade, precious metals analyst at UBS Investment bank.
New ETFs are being launched to attract bullion investors.
An expected change in rules may pave the way for a gold ETF in Japan, while at least two companies are planning to introduce gold securities in India, the world’s largest gold consumer, in the first quarter of 2007.
Gold fell to its lowest in nearly four weeks yesterday as a rally by the dollar prompted bullion investors to leave the market.
Spot gold rose as high as $628.90 an ounce, hit a low of $621.70 and was at $623.00/623.75, compared with $626.00/627.50 late in New York on Thursday.
