Big Funds, Big Gold ETFs

The Gold ETFs have suddenly swelled, but still represent only a tiny portion of pension-fund assets...

ON DECEMBER 17th of 2008, the combined gold holdings of the World Gold Council-launched Gold ETF and Barclays Gold Trust funds stood at 985.59 tonnes, writes Julian Phillips of the GoldForecaster.com.

By Jan. 16th 2009 this had risen to 1009.92 tonnes, and by 30th Jan. early London time they had grown to 1079.83 tonnes after growth of almost 70 tonnes in two weeks.

To give you perspective on this, the Central Bank Gold Agreement signatories – those European central banks agreeing to cap their sales each year – sold only 3.5 tonnes in the last two weeks. And there are many other gold bullion-holding funds, including other ETF trusts in the developed world, from Canada to Switzerland, that are not included in this total

If they were the total would be approaching 1,200 tonnes and more. So clearly we are seeing a stampede of institutional fund management into gold at present!

Gold ETF History

The World Gold Council launched various gold Exchange Traded Funds starting in 2003, now covering the USA., the United Kingdom and the Eurozone, plus Australia and South Africa. These trust funds – in which shareholders own a part of the trust, but not the physical gold which the trust then holds in turn – also attract shareholders from other parts of the world, who access these shares in those countries from outside.

For large institutions, barred from owning physical assets outright, these funds are next only to owning gold bullion itself, the ultimate way to Buy Gold. As a reflection of global developed nations' investment demand, they are limited. Because traditionally investors in the developed world have held gold bullion and coin directly.

In addition, these funds exclude demand from the Indian sub-continent, the most important source of investment demand and from Asia, where gold markets are not sufficiently developed to quantify investment demand accurately.

Perhaps the most significant feature of gold Exchange Traded Funds is that they have only been around for a couple of years. The perceived joy of these funds is that each share in them is taken to represent a portion of gold itself, which these funds buy as the shares are bought. As the shares are sold, so the fund administrators sell equivalent amounts of gold. Not only does this make exposure to the Gold Price – if not the advantages of owning physical bullion "off risk" entirely – much cheaper and easier to deal, it also opened up an entirely new type of investor, who was previously barred from entering the gold market directly.

Gold ETF Scope for Growth

Global pension fund assets were estimated at $18.6 trillion by the end of 2005, and only a tiny proportion of that amount has entered the Gold ETFs so far. Bear in mind that at $900 an ounce, one tonne of gold costs $29 million. So the 1200 tonnes held in this manner represent only $34.8 billion or 0.19% of these pension funds assets. (There are many other types of funds other than Pension Funds as well). So there's quite a way to go before gold makes a dent on these portfolios.

Institutional funds were barred from holding gold itself across the world. At best they would own shares in the Gold Mining companies, but in doing so they added to their holdings corporate risk, a feature many would have liked to avoid. Initially the small size of these Gold ETF funds restrained the larger funds from participating, worried as ever about the liquidity of the shares in these funds. Over time the demand for these shares grew alongside their ability to serve the community as an effective alternative to gold itself. Perhaps the greatest task of the World Gold Council was to educate fund managers in the joys of such shares. It appears their work has borne fruit. Now a fund manager not aware of such an alternative to gold shares is thought of as deficient.

The Gold ETF trust funds are now the global institutional way into gold.