GOLD ANALYSIS

A $600 gold price could see ETF offloading

The VM Group says many investors in gold ETFs are still sitting on large profits as it examines if gold ETFs have been a successful investment.

Author: Tessa Kruger
Posted: Monday , 10 Nov 2008

JOHANNESBURG - 

About 750-800t of gold currently held in ETFs was bought at prices below $750/ounce and only 300t at prices above this level. This implied that many investors in gold ETFs were still sitting on large profits, but if the gold price fell to $600/ounce large outflows of gold could occur, says the Fortis hedging and financial gold report.

The November report by the VM Group and Fortis Bank said it believed that very little investment in gold ETFs was bought at $300/ounce to $400/ounce.

However, more than 200t was bought at prices below $450/ounce and 400t-450t was bought at prices below $600/ounce. Total holdings in gold ETFs are now well over 1,100t.

"So even at today's relative low gold price it appears that many investors in the gold ETF are still sitting on large profits. But if the gold price were to fall to $600/ounce, then a lot of investors in the ETF would suffer losses, which could make them more likely to sell up," said the report.

Gold ETFs saw considerable inflows of 113t in September as the financial crisis raged globally and investors turned to gold for a safe-haven. 

However, the gold price failed to regain its highs of March 2008 despite the large inflows and the price fell back to its lowest level in more than a year after some of the investment fever subsided.  

The VM Group said it was too early to speculate on whether gold's failure to perform had caused long-term damage to its reputation as a safe asset in difficult times. But they could determine whether gold has been a successful investment for gold ETF investors by looking at what price investors in the ETF bought their holdings.

The Gold ETF sector took off with the launch of the US StreetTRACKs ETF in November 2004. Since then it has seen net inflows of gold during most months, while the gold price has fluctuated.

The Group added the fact that many investors in the gold ETF were still sitting on large profits contrasted with silver and PGM ETFs that were launched at a much later stage in the commodities bull market.