ETFs in 2010 - platinum and gold are both winners and losers

A brief review of the performance of the major precious metals funds

LONDON - 

Following the MineWeb podcast with the head of research and investment strategy at ETF Securities (Gold  ETFs stand to gain as bigger investors look to gold as an alternative currency), this is a brief review of the performance of the major precious metals funds and puts them into context in terms of their underlying market sizes and flows of funds.  Platinum is both a winner and a loser, as is gold, while the sturdy performance put up in the first weeks of 2010 by silver and palladium may be flashing warning lights for the coming months - at least in silver's case.

In monetary terms, of course the gold funds dwarf their competitors.  In mid-March the gold contained in the biggest funds amounted to 1,751 tonnes, with a contained value of $62 billion.  The major silver funds, at 12,298 tonnes contained metal worth $5.1 billion, while the PGM funds, while smaller, have been attracting a lot of attention with the launch in January of the ETFS New York-;listed funds (although the metal is stored in London and Zurich).  The platinum funds contain 20.1 tonnes, valued at $1.4 billion, while the palladium funds hold 51.2 tonnes of metal, with a value of $653 million.

Tonnage in and of itself doesn't tell us very much, we need also to look at value, market size and flows of funds in order to put the flesh on the skeleton.

In overall terms, gold's role as a risk hedge obviously underpins investor activity both in the Over the Counter market and in ETFs.  Since the inception of the first fund, now called the SPDR® Gold Shares fund, the major funds have enjoyed a net fund flow of $43 billion, while the overall value of the metal, at $62 billion, is 43% higher than the amount of money that has actually gone into the funds.  Only a net $16 million has gone in when gold has been $1,100 or higher, however and the highest proportion of net inward fund flow has been when gold has been trading between $900 and $1,000.  Interestingly there was actually a net outflow when gold was below $400, suggesting that some early investors lost their nerve (although who's to say that they didn't return?).

Since the start of this year gold has suffered a contraction of almost four tonnes, with a net fund outflow of $136 million.  In terms of market perspective the funds now hold the equivalent of 33 weeks' gold fabrication and bar hoarding demand, and - in terms of fabrication demand rates at least, the fall in gold in the funds has been negligible.

Platinum has been a winner this year but is, in terms of its own market context, the most sparsely populated fund.  Holdings in the major funds amount to 1,392 tonnes or just fewer than eight weeks' global demand while holdings this year have increased by less than half of one week's global fabrication demand this year.  Where it has been the winner is in terms of fund flows; just over $400 million has gone into the platinum funds so far this year, with over $250 million of that going into the New York fund.

Silver and palladium have both added roughly one week's worth of global fabrication demand into the funds since the start of this year, thus effectively bolstering "demand" by about 10%.  This activity has certainly helped to buoy prices of both metals in the first part of the year and perhaps sounds a warning bell; if the momentum comes to a halt then these two metals -certainly silver - will be at risk of falls in price.  The major silver funds hold almost 28 weeks' fabrication demand in their vaults, while palladium holdings amount to 12 weeks' demand. 

The combined value of the holdings in the major precious metals funds stand at almost $70 billion in mid-March.  The reduction in fund flows into gold at prices much above $1,000 begs the question as to whether we are nearing critical mass; the fundamental background, however, argues in favour of gold, therefore suggesting that there is scope for more investment.  Certainly the speed with which the new Sprott physical gold trust bounded onto the scene, mopping up almost ten tonnes in its first four days of trading, suggests that there is plenty of action to be had yet.

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