Gold ETFS Absorb More Than $3 Billion in First 24 Trading Days of 2009

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"An uptake of 111 tonnes in just over one month compares with 316 tonnes in the whole of 2008, 250 tonnes in 2007 and 257 tonnes in 2006."

The markets' renewed belief since the start of this year in gold's role as a risk hedge has been made abundantly clear and nowhere more so than in the figures released for the Exchange Traded Funds. These have been breaking records and making headlines on an almost daily basis.

In the whole of last year, the total net dollar inflow into the major ETFs was $16.4 billion, while in the year to date, just 24 trading days, the major ETFs have taken up some $3.1 billion in the absorption of 111 tonnes of gold. There has been only one day of net redemptions since the year began, and since the start of the year the amount of gold in these funds' vaults has increased from 1,121 tonnes to 1,231 tonnes.

It is worth putting this into some perspective. An uptake of 111 tonnes in just over one month compares with 316 tonnes in the whole of 2008, 250 tonnes in 2007 and 257 tonnes in 2006. These funds tend to be dominated by retail investors and pension funds (they are particularly attractive to those pension funds whose charters do not allow them direct exposure to commodities) and these investors tend to be long term holders.

Retail investors, especially in the United States, also have an affinity for coins and some western investors have been expressing a specific preference for coins even over the allocated metal in an ETF (because they are concerned about counter party risk). The fact that, as a holder of an ETF the investor has an investment in allocated gold and is, therefore, effectively a secured creditor of the holding bank is carrying little water with some frightened investors. The U.S. Mint has so far sold Gold Eagles containing 94,500 ounces of gold (2.9 tonnes), of which 92,000 ounces were sold in January. U.S. coin sales so far this year are running at 3.5 times as much as twelve months ago.

This year's lively level of ETF demand is clearly competitive in tonnage terms with investment bars. If ETFs start to be regarded in the west in the same way that small bars are regarded in Asia, then there is every chance of more substantial inflows, quite apart from the activity from the pension funds. This would be grist to the bulls' mill - but there are two sides of every coin and bears would be able to argue that the holdings in these funds might represent an all-too visible overhang once the financial and economic environment changes.

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