Reviewing the 'New' Kid on the Gold Block

With gold looking to attack the USD 1000 level, it is fitting to review the new kid on the gold block – securitised bullion – that many say has been a contributor to gold’s resurgence. I say “new kid on the block” because gold ETFs are only seven years old whereas people have been storing wealth via gold for over 4,000 years.

The key change ETFs have brought to the market is transparency. In the past gold was purchased in bar or coin form and either stored at home, in safety deposit boxes, or with a custodian. Problem is that all this activity was private, with no reported numbers on the volume traded or held. The ETFs, by reporting their balances daily, now provide a small window into the activities of private investors.

According to the World Gold Council’s (WGC) 2007 figures, private investors (which includes institutions) hold 16.4% of all the gold ever produced (1). Adjusting for latest mine production, this means that as of March 2009 private investment in gold totalled 865 million ounces.

The table below shows all the ETFs and other non-listed custodian facilities who publish regular figures on their holdings. This data has been sourced from www.sharelynx.com, who is the guru for data on gold. Sharelynx tracks all of these products daily and has built an extensive history on their movements, making it an essential subscription for any serious analyst of the gold markets.

ETF/Custodian Facility	Gold Ounces as at July 2009	% share of Total Privately Held Gold
Gold Bullion Securities	40,465,445	4.7%
Zurcher Kantonalbank	4,738,397	0.5%
ETF Securities	2,716,282	0.3%
ishares	2,323,677	0.3%
Julius Baer	1,849,375	0.2%
Central Fund/Trust of Canada	1,571,037	0.2%
Xetra Gold	1,019,540	0.1%
Bullion Vault	583,705	0.1%
GoldMoney	425,168	0.0%
Claymore	366,000	0.0%
Bullion Management Group	92,544	0.0%
Benchmark (India)	68,674	0.0%
e-Gold	68,208	0.0%
GoldIST Turkey	46,780	0.0%
UTI (India)	46,136	0.0%
Reliance Captial (India)	38,935	0.0%
SBI (India)	23,920	0.0%
Kotak (India)	11,060	0.0%
Quantum (India)	1,961	0.0%
Gold "Products" Sub-total	56,456,844	6.5%
COMEX	9,140,646	1.1%
TOCOM	180,464	0.0%
Total Other Privately Held	798,816,800	92.4%
Total Privately Held	864,594,753	100.0%

This table clearly shows that Gold Bullion Securities (listed across many exchanges) is the “King Kong” of gold products. What is more interesting is that it only represents 4.7% of the total amount of gold held by individuals and institutions. Even including in the reported physical inventories of the COMEX and TOCOM futures markets only brings us to 7.6%.

While this is a small “market share”, compare it to the situation five years ago. In July 2004 there were only five visible gold products totalling 2.4 million ounces. Combined with COMEX and TOCOM inventories, this amounted to less than 1% of privately held gold.

The other interesting feature of this table is the small size of the ETFs listed in Turkey and India. GoldIST has been around since 2004 and the Indian ETFs first appeared in mid-2007. By July 2007, there was 141,271 ounces in ETFs across both of these countries. Two years later is it a mere 237,466 ounces. Compared to the considerable size of the physical gold markets in these countries, this is not an impressive performance and shows their continued preference for physical over paper.

Disclosure: Long gold via ASX:ZAUWBA

Comments

[secmaven:]

So called "private" ownership of gold has expanded at three times the rate of central bank sales in the last three years. Where did all this gold come from? And the price increase has been marginal at best during this time. This is not a good sign for the future price of gold. What if even a fourth of this "privately" owned gold is dumped back on the market to raise funds for living expenses? The price of gold will be 500 bucks the ounce very quickly.

Aug 10 04:21 PM

[De Graaf:]

"The key change ETFs have brought to the market is transparency."

Thats a rather bold statement don't you think?

"The ETFs, by reporting their balances daily, now provide a small window into the activities of private investors."

This is no transparacy, this is a tiny window of volume. With HFT and custodian bankers around the block, volume means nothing these days.

Where my real value ! ;))

Aug 11 09:14 AM

[5142152-337:]

Unbelievable rant! You're kidding, right? ETFs instead of physical? Help me to the ER, I'm having sharp pains in my chest!

Aug 11 06:39 PM

[Bron Suchecki:]

I have to say I find these comments interesting. I could have just included the holdings of the ETFs but I added the total privately held gold figure to make the point that as big as GLD is, it is small compared to the rest of the gold out there.

I did say "small" window, maybe I should have said "some" transparency". However, the fact is that there was zero transparency before ETFs, now we have some. Yes, at 6.5% it is a small amount of volume, maybe my problem was that I assumed people could make that conclusion themselves without me having to spell it out. I did not want to drag the article out by going on about it, and thought it better to wait for (inevitably) a contributor to write something about how a change in GLD's holdings was good/bad for the gold price, and then use that as the hook to make the point that GLD is too small to matter.

"ETFs instead of physical?" where do you get this from my article. All I have done is state the facts, you have made that interpretation. And a "rant"? Compared to some of the other crap from contributors who have no experience in precious metal markets, this article is far from a rant.

If I was advocating ETFs over physical, why would I include in my table the Central Fund of Canada, or GoldMoney, both of whom are strong on physical and transparency? Why would draw attention to Turkey and India and finish with "preference for physical over paper"? You are seeing what you want to see instead of what I am actually saying.

I work for the Perth Mint, we make a lot of money from physical coins and bars as well as Depository services. The ETFs are competitors of ours taking away money from coin and bar sales and competiting against our Depository for those customers who don't want to personally store gold. Therefore your accusation that I am advocating ETFs over physical has no basis.

By drawing attention to the fact that ETF's are less than 6.5% of investment, I am telling people that there is another 90%+ of the market that is physical, either personally held or with custodians. As I said, very interesting that you get it completely the wrong way around.

Aug 11 09:00 PM

[Dopamine:]

ETFs are going to be a giant pop.....
It has to be physical, it has to be actual stock ....ETFs are not to be trusted.
The Perth Mint is real.
ETFs are not real.
That was good information Bron, keep it up.

Oct 20 09:11 AM