May 2012

GOLD ETFs: Streets pot-holed with gold

Gold_barsInvestors riding the gold price hit a few bumps recently, but ETFs and other exchange-traded products investing in the sector have seen strong inflows. Nick Fitzpatrick looks at market sentiment. The ever-increasing gold price, which has shot up by nearly 90% since April 2009, has come under pressure this year with investors taking profits or increasing their risk appetite for assets like emerging market equities. Volatility, which has rocked the gold price since August 2011, has also caused some investors to reflect on their exposure to it. Nevertheless, with the first quarter of the year gone, it’s plain to see there is still an appetite for the precious metal. Gold exchange-traded products (ETPs), which include exchange-traded funds (ETFs), saw substantial inflows in the first quarter of the year, beating many other assets. Gold accounted for a substantial amount of the $1,052 billion (€801 billion) inflow into precious metal ETPs during Q1. Flows into ETPs that invest directly in the physical metal stood at $909.9 million, as reported by ETF Global Insight. Flows to ETPs that track the gold price using derivatives – or synthetic products – were $4.8 million. Only emerging market equities, corporate bonds and alternatives outstripped net new assets into physically-backed gold ETPs in the quarter (see box). Trailing gold were global equities, which saw $897.5 million of inflows. Gold bears are likely to note with these figures that the bullishness for gold mirrors a similar bullishness for risk assets, and this is confusing the market. Lately, questions have been asked about gold’s traditional role in modern times as a safe haven rather than a high growth risk asset. Complicating the situation is the fact that money has also been flowing out of other safe-haven ETPs, principally money markets, as the market has returned to “risk on” lately. With risk on, theoretically, gold should be seeing outflows, too. Needless to say, its upward price movement is the reason it has not, but the fact that its price is moving in the same direction as risk assets and, therefore, correlating with them, is also a concern for some investors. If nothing else, all this is a reflection of how opinion is divided about economic recovery, which is not surprising given that just as much news flow recently has been as positive as that which has been negative. In support of the gold price were speeches by US Federal Reserve members Janet Yellen and Bill Dudley in April, who expressed concerns about the US labour market. They said an extended period of accommodative monetary policy is needed to help jobs. This spells continued low interest rates and possibly more quantitative easing, which depresses government bond yields and would make safe haven investors look elsewhere. Recent news flow from China has been important for gold, bearing in mind that – along with India – it is the spiritual home of the stuff and a major consumer of it both for manufacturing and jewellery purposes. Whereas China’s growth slowed to 8.1% in Q1 from 8.9% in the previous quarter, Chinese industrial production and retail sales grew more than expected in March. ETF Securities said gold sentiment was “mixed” after this news, but the ETF provider still saw the best fund inflows to its gold product in five weeks. Breaking records
It is perhaps worth recalling some of what the gold bulls have had to say recently. Dillon Gage Metals, a Dallas-based dealer, said in March that gold could “probably” beat its 2011 record this year. A strengthening safety net for Europe’s debt crisis and improving economic conditions outside Europe could dampen investors’ interest in acquiring gold, but geopolitical conditions, most notably tensions in the Middle East, will continue to buoy the price, Terry Hanlon, president of the company, predicted. He noted that demand for gold bars and coins remained strong worldwide, and on the industrial side, gold’s use in electronics continued to grow. “I look for gold to advance in 2012 and to take out its 2011 peak at $1,895 an ounce,” Hanlon said. He expects last year’s peak to come in the latter part of the year, just as it has in recent years. “Gold may be able to reach a record $2,000 or $2,100 an ounce then.” Thomson Reuters GFMS recently reaffirmed its bullish outlook for gold, forecasting that the bullion price will reach $2,000 an ounce by the end of the year, partly on strong Chinese jewellery demand. Liquid nature
Robert Farago, head of asset allocation at Schroders Private Banking, said recently: “It is not difficult to appreciate the value of a metal of which there is just 170,000 tonnes in existence. For private clients who can afford to tuck away a meaningful sum of money in gold without worrying about its performance over the next decade, this seems a highly sensible option.” He was not speaking about gold ETPs, and whether this type of product is suited for a long-term buy-and-hold strategy is another matter. But if volatility remains, the highly liquid nature of ETFs and ETPs is likely to see these passive, index-tracking products actively traded in the weeks ahead. ©2012 funds europe

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