Gold ETFs - are these the World's best-performing securities?

Retail-style gold bullion ETFs this week hit record levels, holding 45m ounces of gold, more than China and India combined.

Author: Barry Sergeant
Posted: Thursday , 26 Feb 2009

JOHANNESBURG -

This week, the world's six largest gold ETFs (exchange traded funds) held an aggregate 44.6m ounces of gold, or 1,247 metric tons, under management, an all time record. Commodity ETFs, such as these, trade just as do listed stocks, but instead of running as operating gold diggers, the funds buy (and sometimes sell) physical gold bullion, on behalf of investors, saving them the hassles of transport, delivery, storage, security, insurance, and handling. This is real gold, with electronic convenience.

The biggest gold ETF, SPDR Gold Shares, listed on the New York Stock Exchange, ranks as by far the biggest of the gold ETFs, with up to 33m ounces of gold held this week. There are other gold ETFs in the US, such as the iShares COMEX Gold Trust, and beyond, such as ZKB Gold Fund in Switzerland, and Newgold in South Africa.

By now, gold ETFs have become a serious force. It would take Barrick, the world's biggest gold miner, by value and production, nearly six years to produce the gold bullion now held by ETFs. The SPDR Gold Shares ETF alone now has a higher market value than Barrick, ranking it as the world's biggest listed gold security, with a current value of more than USD 31bn.

Gold ETFs are currently trading, in line with dollar gold bullion prices, close to record highs seen during March 2008. As such, gold ETFs (and the yellow metal) rank among the best, if not ranking as the best, performing securities in the world. While listed gold stocks rank, relatively, as the world's best performing equities subsector, gold stocks remain, on average, 50% below highs, compared to just 9% below for the SPDR Gold Fund.

The 44.6m ounces (1,247 tons) of gold bullion currently held by gold ETFs, and effectively owned mainly by retail investors, has reached country-size proportions. Gold ETFs, first launched in 2003, have allowed retail investors into a whole new world, but the potential for country-owned gold bullion remains robust, as global economies rebalance.

China, which remains the epicentre of global economic growth (despite recessions in so many other countries), holds just 700 tons of gold, worth roughly 1% of its giant foreign exchange reserves, compared to 58% for the Eurozone (including Russia), with 10,911 tons, and 77% or 8,133 tons, locked up in Fort Knox in the US.

For some months, there has been some resistance to higher gold prices, not least in India, the world's biggest buyer of gold for both investment and jewelery purposes. But the bigger picture is that India houses roughly 29,000 tons of gold, of which the Indian central bank owns just 400 tons.

While official Chinese gold holdings remain relatively small, the country moved into No 1 gold miner position during 2007, with around 270 tons. During 2007 and 2008 inclusive, China added around USD 1 trillion to its foreign exchange reserves. Given that gold bullion traditionally ranks as a measure of a country's economic health, its currency and fiscal responsibility, it would hardly be surprising to see China increasingly diversify its reserves in favour of the yellow metal. Much the same can be said for other rising Asian nations.

And will individual Chinese investors seek to preserve their wealth with the prospect of a weakening renminbi? It has long been shown that gold bullion is most sensitive to investment demand, but ETFs have done much to change that. Next month, a Sharia compliant gold ETF is planned to list in Dubai, where jittery Middle Eastern investors continue to ponder looser domestic currency ties to the dollar