Gold ETFs stand to gain as bigger investors look to gold as an alternative currency

As investors focus more and more on sovereign risk issues so gold stands to gain

GRONINGEN - 

Gold is increasingly being viewed as an alternative currency; a theme that is likely to continue throughout 2010 and, possibly beyond.

And, it is a view that changes the way in which investors react to the yellow metal. This is the view of Nicholas Brooks, , head of research and investment strategy at ETF Securities.

Speaking on the Mineweb Gold Weekly podcast, Brooks said, "Investors are starting to focus much more on the sovereign risk issue. Greece has obviously brought it to investors' attention but obviously there is a lot of concern about what's happening in terms of debt and fiscal balances in developed economies such as the UK, the US and a number of the so-called peripheral European economies and in this environment there is a general concern about the risk of currency debasement and also the concern that governments may be tempted to try and create inflation in order to reduce the real debt levels."

To listen to the podcast click here

This thinking has resulted in a shift away from viewing gold purely as a hedge against the US dollar, where investors and, especially, short-term traders tend to buy gold when the dollar is weakening, sell when it strengthens.

What we are seeing more and more of now, Brooks says, is a rising gold price even when the dollar strengthens.

"As an example in February we saw the gold price hit an all-time-high in both euro and in sterling and a lot of that went uncovered by many publications.  But I think that is quite significant because of course the gold hit an all-time-high in US dollars last year, we are well over almost $1000, but it is quite a significant event when it moves to an all-time-high in two of the other world major currencies - the sterling and the euro and that highlights to me again that investors are all looking at gold as a place to put cash during a period when there are growing concerns about government intentions and government policies."

What about the role of ETFs?

Brooks maintains that the gold ETF market is rather less prone to the speculative vaguaries of things such as currency fluctuations than other parts of the gold market.

"We find that the flows are quite stable.  In other words during periods when the gold price has dropped sharply we have rarely seen very large outflows - at the same time when the gold prices is rallying at a very aggressive rate we don't tend to see a surge in inflows into the gold ETFs - a lot of the flows into the physically backed gold ETFs are strategic in nature.

And, while he admits it is too early in the cycle to know exactly how long-term these flows are, he does say that "most of our investors are large institutions and pension funds and fund managers and private wealth as well and again the pension fund of course will have a very long time horizon."

Where to from here?

With around $60bn in physically backed gold ETFs at the end of 2009, there is no denying the rapidity of the growth of these instruments but, how much further can they grow.

Brooks, says that while it is difficult to predict growth rates at the best of times he does think that the debt issues facing the global economy are unlikely to disappear anytime soon.

"Another factor that's coming into play is that we're starting to see some of the sovereign wealth funds - so for example the China sovereign wealth fund moving into physical backed gold ETFs.  Also central banks have been moving into gold as well - so we've seen of course more recently it was announced that India was buying 200 metric tons of the IMF gold.  We know China would like, on a medium term basis, to build up its gold reserves.  And of course some of the smaller country central banks have been building up as well.

Investors do want to diversify away from the dollar - I'm not arguing that they're about to aggressively sell dollars necessarily, but on a medium term basis a lot of the central banks and sovereign wealth funds would like to reduce their overall exposure to the dollar.  And of course, when you look at the euro it's an imperfect currency - the yen, you're dealing with a very large government debt level in Japan.  So when you look around the world, there aren't a lot of options and I think that increasingly the central bank sovereign wealth funds along with private investors, are looking at gold as a place to keep capital in these uncertain times."

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