From Exchange Traded Gold: Since the beginning of 2006, gold in the Exchange Traded Gold stable of funds, notably StreetTRACKS Gold Shares and Lyxor Gold Bullion Securities, has increased from around 11.6 million ounces worth some $6 billion to almost 18 million ounces worth $11 billion. The impressive factor last year was the generally unfazed behaviour of Exchange Traded Gold investors when gold experienced sharp setbacks. In the face of large sales of gold futures and options there were minimal changes in Exchange Traded Gold holdings, illustrating that ETF gold investors are medium and long term holders of the metal.
Besides purchases of gold to hedge against economic and political uncertainty, the products are also benefiting from the growing popularity of the vast variety of exchange traded funds. According to Morgan Stanley there were 669 global ETFs with assets of US$505 billion at the end of the third quarter last year. Growth has been extraordinary. In 1993, when the first ETF was launched, global market capitalisation for all the ETFs amounted to only $812 million, rising to $40 billion in 1999 to $212 billion in 2002 and more than $500 billion currently. Morgan Stanley predicts that ETF assets under management will exceed $2 trillion in four years time. They are becoming increasingly popular with institutions with ongoing regulatory changes favouring these products.
These predictions are not surprising given the staggering size of global financial investments. McKinsey, the management consultant, estimated that the value of total global financial assets-including equities, government and corporate debt securities, and bank deposits expanded by $7 trillion to $140 trillion by the end of 2005. Global cross border capital flows topped $6 trillion, a new record and more than double their level in 2002.
McKinsey stresses that deeper financial markets typically provide better access to capital; improved pricing and efficiency; and better allocation of risk. The gold market has far more liquidity than other metals and StreetTRACKS Gold Shares (NYSEARCA:GLD), in particular, is benefiting from higher volumes.
Given the size of global financial wealth and the trend to diversify into alternative assets, only a tiny percentage of flows would cause a sharp growth in gold investment. Investors are buying gold because of growing risks and extraordinary contradictions in global financial markets. The main worry is asset price inflation, while some economists fear acceleration in general inflation.
On the other hand, long US Treasury bond yields are lower than shorter term bond yields. This is a classic sign that bond market participants are expecting a sharp US economic slow down, especially if the real estate market slumps. The dollar has been weak because of these worries but long European bond yields are also down because of fears of economic slowdown in that region. If an economic downturn is indeed a possibility, European currencies may well be vulnerable. Oil and industrial commodities, fashionable for hedge fund and even pension fund speculators last year, are sliding as demand has failed to meet expectations.
Despite these concerns, global equities have continued their upward path. Central bankers in particular are concerned about a bubble of leveraged private equity transactions that have contributed in no small way to the rise in equity prices. They are also concerned about the massive growth in credit derivatives and hedge fund debacles. Amaranth, for example lost a staggering $6,400 million in only a few weeks.
These are just the economic and financial factors. Many market ostriches are ignoring geopolitical risks. Nuclear capability is spreading from North Korea to Iran, which has expansionist aims in the Middle East. The potential response from Israel and possibly Saudi Arabia is fraught with danger, whilst the chaos in Iraq, the unknown strategy of Russian energy supply and finally continued and random terrorist attacks, all increase the level of uncertainty in today’s investment climate.