Gold - Investment Demand Stampedes


"Clearly we are seeing a stampede of institutional fund management into gold at present!"

On December 17th 2008, the combined gold holdings of the World Gold Council gold Exchange Traded Funds (ETFs) and Barclays Gold Trust stood at 985.59 tonnes. By the 16th January 2009, this had risen to 1009.92. By January 30th, early in London time, they had grown to 1079.83 a growth of almost 70 tonnes in two weeks.

To give one perspective, the Central Bank Gold Agreement signatories [European central banks only] sold only 3.5 tonnes in the last two weeks. There are many other gold bullion-holding funds in the developed world from Canada to Switzerland that are not included in this total. If they were the total would be approaching 1200+ tonnes. Clearly we are seeing a stampede of institutional fund management into gold at present!

Gold ETFs are next only to owning gold bullion and coin itself, the ultimate way to own gold. As a reflection of global developed nations investment demand they are limited, because traditionally investors in the developed world held gold bullion and coin directly.

The perceived joy of these funds is that each share in them represents a portion of gold itself, which these funds buy as the shares are bought. As the shares are sold, so the fund administrators sell equivalent amounts of gold. Not only does this make the holding of gold much cheaper and easier to deal in their formation opened up an entirely new type of investor, who was previously barred from entering the gold market directly. This type of Investor has the capacity to be by far the largest holder of gold ever seen. With global pension fund assets estimated at $18.6 trillion by the end of 2005 only a tiny proportion of that amount has entered the gold ETF market so far.

Institutional Funds were barred from holding gold itself across the world. At best they would own shares in the mining companies that produced gold. In doing so they added to their holdings corporate risk, a feature many would have liked to avoid. Their arrival on the stock exchanges of the developed world signaled a way to lower such risks and 'own' gold itself via these shares. Initially, the small size of these funds restrained the larger funds from participating - worried as ever about the liquidity of the shares in these funds. Over time the demand for these shares grew alongside their ability to serve the community as an effective alternative to gold itself.

The Central Banks of the world are the largest holders of gold in themselves, despite that unquantifiable fact that around 20,000 tonnes of gold are held privately across the Indian sub-continent. If we are to take the entire privately held gold ETF shares they would represent more gold than held by the Swiss National Bank, Switzerland's central bank.

The present global economic climate, fraught with uncertainty, fear and currently a savage gauntlet for fund managers is making gold a desirable alternative and counter to such investments. Fund manager after fund manager is weighing the wisdom of holding gold in portfolios as a result. Consequently, as the 2009 prospects for the global economy point to deflation of frightening proportions followed likely by explosive inflation as the Tsunami of newly printed money from all parts of the globe hits it, gold has moved to center stage as an investment of note.

It is likely then that these investment vehicles will be at the vanguard of fund management in gold in the years to come.

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