But almost overnight, exchange-traded gold funds (ETFs) have created a revolution in bullion investment. Such is the popularity of the instrument that bullion bankers and fund managers say the gold ETF market’s capitalization, now at $10.4 billion, could reach $100 billion within a decade.
The funds, which enable small investors to buy a tenth of an ounce of gold with the same ease as buying shares but without actually taking delivery of bullion, are particularly in vogue as gold prices break through 25-year highs to reach $715 an ounce. “The development of gold ETFs is the most significant development in bullion in the past 30 years,” says John Hathaway, a senior portfolio manager at US-based Tocqueville Fund. “The market capitalization could easily reach $100 billion over the next 10 years.”
The gold ETFs, which are set up like mutual funds but trade on the London, New York, Sydney, Paris and Johannesburg stock exchanges, have put 450 tonnes of bullion in investors’ hands, equivalent to the amount held by the world’s 11th-largest central bank. Most gold ETF trading has been done in New York, with $8.1 billion invested, followed by London and Paris, which have done $1.7 billion-worth combined. Interest has been less fervent in Australia, where investors have bought 9 tonnes of bullion, or $213 million-worth.
Simon Village, director of Gold Bullion Securities, who helped design gold ETFs and whose firm runs the three funds in London, Paris and Sydney, says he plans to unveil more funds later this year, as his firm and the World Gold Council encourage institutional investors to diversify around 2% to 3% of their portfolios into gold.
Gold looks like a hot asset because prices have risen 150% since April 2001; bullion bankers, such as Jeffrey Rhodes of Standard Bank, predict that the price will reach $1,000 an ounce over the next two years. Investors are moving out of a weak US dollar, worried about the strength of the global economy, Iran’s nuclear plans and continuing conflict in Iraq. Mining companies such as Newmont, one of the world’s top gold producers, also back the view on prices and predict both stagnating production and rising demand for jewellery from India and China. “We are going to see a lot of volatility in gold prices and ETF investors should be aware of that but they are medium-term to long-term investments and the price outlook looks very bright,” says George Milling-Stanley, a director at the World Gold Council.
