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Most of record gold demand is diverted into ETFs
Record Inflows for Gold Funds
By Ruth Sullivan
Financial Times, London
Sunday, June 6, 2010
http://www.ft.com/cms/s/0/a667d16c-7003-11df-8698-00144feabdc0.html
Investors are taking flight to precious metals, particularly gold, as concerns grow about sovereign debt.
Worries over eurozone debt burden and fears of a possible resurgence of inflation are driving investors to an asset class traditionally perceived as a safe haven.
"People are looking for somewhere to put their money. They are looking at gold as an alternative currency exposure," says Nicholas Brooks, head of research and investment strategy at ETF Securities, an exchange-traded product provider.
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Gold funds tracked by EPFR, the US global fund data group, saw $5.7 billion of net inflows in the three weeks to May 19, of which nearly $5 billion went into exchange-traded funds.
Investment demand drove up the price of spot gold to a nominal record high of $1,248 a troy ounce in May, although it has slipped slightly since then.
Gold ETP flows hit a record of $26 billion to May 25, from the beginning of 2009, buying more than 2,000 tonnes of the precious metal, according to Barclays Capital.
The SPDR Gold Shares, the world's largest gold ETF, is also seeing huge inflows into its physically backed product, holding a record 1,200 tonnes with a value of almost $47 billion on May 20.
At ETF Securities, Mr Brooks has seen "larger flows in the past month into physically backed gold ETCs than at the height of the financial crisis." In one week last month (May 7-14), trading on its ETC platform hit an all-time high of more than $2 billion, driven by strong trading volumes in precious metals. Gold made up almost half of the trading, while platinum and palladium accounted for 12 per cent.
This month will also see the launch of the Physical Gold ETC from dbx-trackers, who have until now focused on ETFs. Most of the inflows into physically-backed gold stem from institutional European investors trying to reduce exposure to the euro, says Mr Brooks. In the US, investors are getting their first taste of physically-backed platinum and palladium ETCs, recently launched by ETFS.
A general surge in international investment between January and early May for both metals saw palladium prices rise by 35 per cent and platinum by almost 19 per cent. However, prices declined recently as some investors took profits after a stellar run, particularly in palladium. Both metals are used by the car industry in catalytic converters.
Although it may seem ETPs are eclipsing more traditional types of investing such as actively managed commodity funds, fund managers say they are also seeing increasing interest.
Evy Hambro, fund manager of the BlackRock Gold and General fund, which invests mostly in gold companies and a few platinum and diamond ones, has been getting a spate of enquiries from private family offices, hedge funds, pension funds and retail investors.
The classic question they ask is "whether to own gold through an ETF or invest in a [traditional] fund," he says. Hedge funds have also been building up their positions in gold, including the Soros Quantum Fund, which has $600 million invested in gold ETFs, according to the World Gold Council.
Wealthy investors are also big buyers of gold ETFs, especially larger investors, in addition to buying bullion for their own vaults, according to Marcus Grubb, managing director of investment at the World Gold Council.
Tales abound of family offices trying to rent additional vault space in London. At Schroders Private Bank, Rupert Robinson, chief executive, has held an average of 8-10 per cent of clients' portfolios in gold and gold stocks in the past 18 months.
Sovereign wealth funds are also becoming goldbugs. Last December, China Investment Corp., the Chinese sovereign wealth fund, invested $1.45 million in the SPDR Gold Trust, while central banks have shifted from selling to buying, helping to push up the price.
But perhaps it is pension funds that are making the biggest change in direction. "Traditionally pension funds shied away from gold and commodities," says Mr Grubb. In the past, pension fund trustees said gold and other precious metals were difficult to value and did not have a yield, "but this is beginning to change," he adds.
US pension schemes, in particular, have been buying gold, including the Teachers Retirement Scheme of Texas and the New Jersey Division of Investment. The former scheme invested $125 million in the SPDR Gold Trust last October and a similar amount in precious metal mining stocks, setting up a separate gold portfolio to hold the investments, according to the World Gold Council.
However, concerns about gold becoming the next bubble are surfacing. At Davos, earlier this year, George Soros warned that low interest rates could generate new bubbles, including gold.
Others are more optimistic. Mr Robinson says there are "signs gold may be becoming over-owned and too fashionable in the short-term," but in the long-term "it is a good asset to hang on to." He believes "it could easily reach $2,000 an ounce within the next five years."
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The Anglo Far-East Bullion Co.'s Gold and Silver Conference
The conference will explore the dangers and opportunities in today's bullion markets and the need for investors to diversify bullion holdings outside of bullion banking and commodities markets. Speakers will include David Morgan of Silver-Investor.com, Gold Anti-Trust Action Committee Chairman Bill Murphy, and Duncan Cameron and Philip Judge of Anglo Far-East Bullion Co. The earliest conference attendees on Saturday will be able to schedule one-on-one interviews for personal consultation with Anglo-Far East's experts on Sunday.
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