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Gold ETFs - a monster child?
Jessica Cross
Posted: Mon, 17 Dec 2007
[miningmx.com] -- NO ONE disputes the success of the gold Exchange Traded Fund (ETF) as an investment vehicle. Since the debut of the first on 31st March 2003, total purchases are 850 tonnes.
There are now 12 gold ETFs offered in 7 different countries (not including secondary listings). And there are more to come. Surely this is good news for gold? Maybe.
The investment environment in 2008 is likely to be characterised by further interest rate cuts in the United States, ahead of the presidential elections and as a result, an ever weaker dollar. Should this be the case, then gold will benefit from a double whammy – the weaker US currency and the looming possibility of a US economic slowdown, leading investors to flee equities.
Higher gold prices tend to beget increased investment interest so it is logical to deduce that the ETFs will attract further funding in 2008. VM Group are forecasting that by the end of 2008 no less than 1,000 tonnes of gold will be a tied up in these products and, at $800/oz, this equates to some $26 billion.
But how much of this $26 billion in gold ETFs is genuinely fresh investment which was not previously tucked away somewhere else? Might it not be the case that this investment in gold ETFs has been sucked out of gold mining equities and
diverted into the ETFs?
Analysis of the data available reveals that least 40% of the ETFs are held by institutional investors and hedge funds – the very entities that usually are substantial investors in equities.
Is it possible that sponsors and creators of the ETF concept (the gold mining company members of the World Gold Council) are now being disadvantaged by their own creation?
Gold equities have done reasonably well in the current boom – but much less well than gold itself. If there is a fall back in the gold price, we expect gold equities to suffer much more than holdings in gold ETFs.
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