Gold getting recognized as 'ultimate hedge'

Flight to Gold Exchange-Traded Funds

By Ruth Sullivan
Financial Times, London
Friday, September 28, 2007

http://www.ft.com/cms/s/0/b7b1b582-6abb-11dc-9410-0000779fd2ac.html

A flight to the age-old safe haven of gold in times of market turbulence is appearing not just in spot gold, where prices came within a whisker of $740 a troy ounce last week -- its highest nominal level in almost 28 years -- but is also spreading to exchange-traded funds, where investors have been showing an extraordinary appetite in recent weeks.

ETF Securities has seen money that is invested in its physically backed gold ETF increase 240 per cent in the past seven weeks. Its total assets under management in gold-backed exchange traded commodities exceeds $300 million, while total assets under management invested in precious metals ETCs is above $500 million.

"There has been an increase in demand for ETCs linked to the price of commodities and particularly gold and precious metals. This demand has come from investors seeking to diversify their portfolios away from equities and bonds and into other asset classes," says Nik Bienkowski, head of listing and research at ETF Securities.

Independent studies have shown gold and precious metals have low to negative correlation with equities and in times of market uncertainty and stress he sees that the low correlation holds.

"Gold is increasingly seen as the ultimate hedge," says Hector McNeil, sales and marketing manager at ETF Securities. People are waiting to see how the market crisis will pan out, he adds.

Among the buyers are private bankers purchasing for capital protection, hedge funds keen to get an exposure to physical gold on a cost-effective basis, some multi-asset funds with wide mandates such as those operated by New Star, BlackRock, and Newton, and retail investors who like and understand gold, says Mr McNeil.

In addition to being seen as a safe haven, the ease of investing in a gold ETC is attractive, as well as its liquidity, which is drawn from the underlying market. "An ETC is the next easiest thing to stacking gold under your bed," says Mr McNeil. It provides investors with a return equivalent to movements in the spot price of gold, less a small management fee that accrues daily, he says.

Since July, gold has resumed its normal status as a safe haven, says Daniel Draper, head of Lyxor ETF for UK, Ireland and the Nordic region. "We have seen a real spike up in trading volumes and assets under management [in gold ETCs] since August 17 and again since the Fed cut its interest rate."

The Lyxor Gold Bullion Securities fund, designed to track the price of gold, last week stood at $2.118 billion and is the largest ETC that trades on the London Stock Exchange, he says. As well as short-term traders, Mr Draper is also seeing a lot of demand from asset allocators on a longer-term basis. At Exchange Traded Gold, a World Gold Council initiative, and the umbrella under which exchange traded gold products are developed and managed, Owen Rees, European business development manager, notes: "In the last few days we've seen six tonnes of gold come in our UK product with most of the interest coming from retail investors."

"There has been even stronger growth from the US, where our StreetTracks Gold Shares product has seen $1bn come in over the last few days," says Mr Rees. who attributes the flows to dollar weakness and the subprime mortgage crisis. "Gold is exceptionally attractive in the US at the moment," he adds.

The price of ETFs on the New York Stock Exchange is following the gold market, says David Burkart, a senior portfolio manager in commodities at Barclays Global Investors, the dominant global force in the industry. "We're seeing a flight to quality in gold with US currency concerns, portfolio diversification and petrodollar recycling also playing their parts."

However, he says the Gold ETFs in the iShares family of funds did not pick up until the end of August and early September. Growth and volume in silver ETFs picked up a little at the beginning of the credit crisis but "the real change we're seeing is in gold."

"A year ago, the size of these products was almost non-existent. Now we're managing over $5 billion just in commodity iShares," he adds.

In a report on ETFs compiled by Morgan Stanley last month, assets in ETCs across all commodities showed an increase of 37 per cent on a year earlier to $22.88 billion.

"People have watched volatility in the equity markets in the last couple of months and been concerned about quant models. Now they are looking for a safe place to put their assets," says Deborah Fuhr, a managing director at Morgan Stanley.

Investors are also showing interest in mixed metals baskets, including platinum, palladium, and silver. ETF Securities says investors are typically showing keen interest in baskets of precious metals with about 40 per cent in gold, 25 per cent in silver, and the rest divided between platinum and palladium.

As interest in ETCs grows, the product offering is widening. In the next few weeks, ETF Securities will issue a new range of forward ETCs in response to demand from investors for more choice, access to a different part of the commodities futures curve and to longer dated futures. The new ETCs will provide exposure to commodity futures prices that are linked to the Dow Jones-AIG Commodity three-month forward indices.

The increased demand is also coming as knowledge about commodities investing grows.

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