Private interest could create more gold funds

Pakistan - Sindh - Thatta - Shahjahan Mosque - gold fundsThe five gold-backed investment funds already traded around the world could be the tip of the iceberg if investors allocate more of their funds to the metal, an official at the World Gold Council said this week.

“We are just starting to see a transition,” Katharine Pulvermacher, head of asset allocation research at the World Gold Council, said.

Private banks had been in gold for a while, she said, but now long-term, stable and mature investors who were not covered by the private banking sector were starting to emerge.

“We are seeing the tip of the iceberg,” she said on the sidelines of the African Mining Investment conference in London.

Exchange-traded gold funds (ETFs), which offer shares in a bar of gold and can be traded on a stock exchange, have amassed some 280 t of gold in the last two-and-a-half years, she said.

The funds include Gold Bullion Securities, StreetTRACKS Gold Trust and COMEX Gold Trust.

“I am a great believer in the market and if the market believes there is room for growth then we will see more of these kinds of products,” Pulvermacher said.

She said there was scope for private investors to increase their allocations in gold.

“You would expect investors to have a strategic exposure to gold, with the average percentage varying depending on what country they are in.

“The variation is partly due to the impact of currency movements, and partly due to specific regulatory constraints. Generally, the more regulatory constraints you have, the higher the optimal allocation tends to be,” she said.

This was because people would buy gold instead of other assets they may not be able to access.

“One example of this would be countries that still have capital controls or constraints on investing in offshore assets.”

She said currently only a fraction of a percent of global private sector assets were invested in gold, although above-ground stocks of gold were worth between two and five percent of global financial assets.

“I don’t believe rising interest in gold-backed assets will come at the expense of other means of investing in the metal,” she said.

“To a certain extent there may be some substitution by people who may otherwise have accessed bullion. But these products have created a bit of a buzz, raising interest in the sector as the whole.”

Pulvermacher said she was not able to comment on future price developments in gold but she did say: “Supply is relatively inelastic and is unlikely to increase dramatically in the next five to 10 years.”

“It takes a long time to bring on a new mine or restart an old one. That primary production accounts for about two thirds of supply.”

“Central banks sales account for about 15 percent of gold supply, but that is capped by central bank gold agreements, so that is also inelastic.”

She said the rest came from jewellery and industrial scrap.

“Part of that comes from people who invest in jewellery for its high gold content in areas including India, Vietnam and Japan.”

Source: Mining Weekly


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