| |
ETFs, gold equities and the self-reinforcing loop
Vladimir Nedeljkovic
Posted: Mon, 10 Dec 2007
[miningmx.com] -- AS of the time of writing of this article, the total gold holding in the four largest gold ETF families worldwide (Streettracks Gold Shares, Gold Bullion Securities, iShares COMEX Gold Trust, and the JSE-listed NewGold Debentures) was 788.40 tonnes, valued at $20.24bn.
According to Barclays Capital’s research , inflows into the physically backed gold ETFs have risen by 32.5% this year (205 tonnes).
In South Africa, the increase in ETF gold holdings was even more remarkable. During 2007, the ounces in NewGold, the only commodity ETF in South Africa, have almost doubled – from slightly above 329,000 ounces at the beginning of the year, to more than 652,000 ounces (20.3 tonnes) at the moment.
The net asset value of the assets under management increased 144%, from R1.46bn at the beginning of the year to R3.57bn at present.
Why such a dramatic
increase in demand for gold in the form of gold ETFs?
According to the same research piece by Barclays Capital, more than half of the new demand came within the last two months; before then inflows were slow and erratic.
More importantly, the investor trading patterns moved from speculative trading as seen earlier in the year, towards the buy-and-hold strategy, indicating positive investor
sentiment towards the metal.
In South Africa, this trend towards accumulating and holding gold investments for longer was even more pronounced.
Of course, the overall change in the investor behaviour and the attitude towards gold coincided with the increase in the gold price – during 2007, US dollar gold price increased 26%, but 19.4% since October 1. In Rand terms, the situation was similar – 22.6% increase in 2007, 13.6% since October 1.
Whether the increase in the gold price caused the change in the investor sentiment, or whether it was the other way around – that changed investor sentiment, triggered by geopolitical and broader financial market concerns as well as higher inflation expectations mostly driven by the record high oil prices supported the gold price – is difficult to say; probably, it was a combination of both, a self-reinforcing loop.
The important question at the moment is: will this self-reinforcing loop continue to drive the
investor demand and the gold prices up? Again, it is difficult to say, given the multiplicity of factors influencing the price of any asset.
Perhaps, it might be informative to look at the fundamentals, the supply-demand dynamics. Barclays Capital estimates that, including all flows, the gold market has swung into deficit this year of 234 tonnes from a surplus of 197 tonnes last year. According to their supply-demand model, the market has not been in such a wide deficit since 1979.
Finally, if the investors do believe in the story of continuing gold strength, the question is: how to buy into it. In South Africa, the choice is between direct gold investment (through the NewGold ETF or through much less liquid Krugerrand coins) or indirectly, through the investment in the shares of gold mining companies.
At the moment, the answer is simple: during 2007, while the Rand gold price increased 22.6%, the gold equities, as measured by the FTSE/JSE Gold Index,
declined full 12.1%.
| |
