Rise of Gold ETFs Raises Concern of Price Collapse

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"Market watchers warn that shiny investment vehicles could increase the speed and depth of a future crash."

CNBC - The explosive growth of precious metals-linked exchange traded funds has prompted some market watchers to warn that those shiny investment vehicles could increase the speed and depth of a future crash.

In early 2005, BlackRock's iShares came out. One share equals 1/100th of an ounce of gold, giving investors a cheaper entry point. It has around $6.5 billion in assets, 134 tons of gold, and a fee of 25 basis points.

"We can't ignore the fact that such a gorilla has landed on the scene and I reckon that it probably has added a good $300 to the price equation," Jon Nadler, senior metals analyst at Kitco Metals in Montreal, said of the impact of gold ETFs on the price of the metal.

His concern is that because hedge funds are big investors in gold ETFs, once they have reached their profit targets, or sense the interest rate environment is changing, they will sell their substantial stakes and take their dollars elsewhere.

That sizable outflow, which he said could be in the range of 200 tons to 300 tons—or 10% or more of the total holdings of gold ETFs—could cause a sharp drop in the price of gold to $900 or lower.

But Tom Anderson, global head of ETF strategy and research at State Street Global Advisors, argued that if the hedge funds that own GLD shares all bailed out, it would be an orderly process.

"GLD trades $2 billion worth of shares every single day, so there is an awful lot of liquidity in that product, so it could absorb an awful lot of selling just in the course of its daily business," he said.

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