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SA’s NewGold reins in Aussie counterpart
Allan Seccombe
Posted: Fri, 11 Aug 2006
[miningmx.com] -- NEWGOLD, South Africa’s gold-backed exchange traded fund (ETF), continues to gain traction among investors.
According to Vladimir Nedeljkovic, of capital and debt markets at Absa, the bank that backs NewGold, the ETF is now larger than its Australian counterpart. That’s some achievement. Australia’s ETF was the prototype from which the rest of the world’s gold ETFs were born.
“Out of all the securities on the JSE these had the fastest growth,” says Nedeljkovic of NewGold, adding the ETF has impressed on the downside after gold slipped from its 26-year high of US$730/oz on 12 May.
“As the gold price pulled back to the mid-$600/oz range the rand weakened, keeping the rand gold price more or steady above R120 000/kg, at which levels SA’s mining houses make money.
“When we had a correction... NewGold performed admirably well. It’s important because it’s not just how well a security behaves on the upside but how it behaves on the downside,” Nedeljkovic says.
The gold mining stocks outpaced a retreat by the overall market in May. Starting at an index value of 100 on 24 April, the gold companies had fallen to below 90 a month later, while the NewGold ETF gained ground above 110.
NewGold has overtaken the older Australian gold-backed ETF in size, growing to 350,000 oz since launch in November 2004.
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Charting the annual performance of the JSE’s gold and Top 40 indices against that of NewGold, a period that included a meteoric rise in the price of gold, the ETF and other two indices ended the period at very nearly the same level.
However, the gold index, which is sought out because of companies’ gearing to the gold price, showed steep peaks and troughs over the year to May against NewGold’s steadier ascent.
Says Nedeljkovic: “On a risk return basis you’d argue that it’s better to invest in NewGold rather than gold stocks. Gold shares are hugely geared and people overreact. If the gold price moves down then the gold shares will move even more. The day traders like the volatility of gold shares but most investors would prefer stable growth.”
Some 95% of NewGold is held by institutional investors, who are now also offered warrants. The growth in South Africa’s nine ETFs matches the phenomenal growth in the global appetite for the instrument. Since 2000 the market cap of South African ETFs has grown by more than four times to more than R12bn. It’s grown globally from zero in 1994 to currently more than $416bn in 453 ETFs.
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Paul Walker, a director at British research house GFMS, says the ETF phenomena has opened up the commodity market to pension funds. “Pension funds are only mandated to invest in shares, which an ETF is. It’s a proper share listed on the exchange. But it’s also created new business for banks, which have developed derivative products on the back of ETFs.”
And Walker doesn’t believe ETFs are a passing fashion. “The feeling we have is that investors in ETFs buy to hold.”
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