Gold could now be traded like an equity. What now seems simple and hugely successful was initially complex in design and, currently, 54 physical gold ETPs exist with around $130bn in assets and daily trading of more than $2bn globally. Gold ETPs would rank the fifth-largest holding if it was a central bank and in ten years the industry had accumulated one year’s worth of new mine production.
Gold in all its colours
Starting with a single product (the idea of an Australian entrepreneur), there are now 124 ETPs listed on 35 stock exchanges providing investors with a wide variety of gold ETPs including physical, currency hedged (including Australian dollar, Swiss franc, sterling and euro), leverage and short.
Investors now have direct access to gold, they can trade gold versus gold miners, gold versus equities, gold as portfolio insurance, gold versus the dollar and gold as an asset allocation, to name a few of the most popular trades.
With $130bn and $200bn in assets respectively, gold ETPs and commodity ETCs (including gold) make up 7% and 10% of the global ETP market which is high relative to average portfolio allocations – this statistic may indicate the importance of the gold ETP to investors as a way to access the gold price.
The gold ETP made investing in gold secure, simple, cost-efficient, and extremely simple.
With gold having risen 384% since 28 March, 2003, while the FTSE 100 returned 67% over the same period, we cannot ignore that the birth of the gold ETP came during a time which was extremely supportive for gold, especially relative to equities.
There has been a reason for most to invest in gold since the gold ETP launched, which includes a crisis hedge, dollar weakness, rising commodity prices, credit contagion, falling equity markets, search for alternative assets and uncorrelated assets, portfolio diversification, and growing gold demand in China and other emerging countries.
The death of gold?
Despite record inflows, the gold industry may currently be at an inflexion point. Since 22 August, 2011, the gold price has fallen by 15% however gold flows continued, increasing by approximately 13 million ounces (18%) to a record high 87.2 million ounces between 31 August 2011 and 30 November, 2012. Since reaching its high, there have been record outflows of six million ounces (or $9.5bn) as the dollar strengthened and global sentiment improved.
The average daily gold price change between 2006 and 2008 was 1.12%. However, since then the average daily gold price move has fallen to 0.78% over the past four years (a fall of 30%). As a result, investors looking to profit from gold have been increasing their use of short and leverage ETPs which now provide investors with up to 3x the daily change in the gold price.
It will be interesting to see what happens over the next ten years. Gold ETPs still have not reached their potential, especially in Asia, and China is still yet to launch a range of gold ETPs supposedly in development.
It will also be interesting to watch financial market developments. Will the perfect storm and other factors supporting gold remain in place or will equities take over? Will gold break that $2,000 mark or will gold slowly retreat like it did between the years 1980 to 2000 when Time magazine and many investors called for the “Death of Gold”?
Whatever happens, we can be sure that the last time the masses proclaimed the death of gold, we experienced the birth of the gold E TF.
