Default Fears Drive Gold ETP Success

December 22, 2010

Concerns over sovereign default have spurred the bullion tracker market towards another record year.

[This article originally appeared on our sister site,]


Barring a dramatic end-December collapse, 2010 will be the ninth year in succession in which the dollar gold price has gone up. At Wednesday morning’s market price of US$1,388 per troy ounce, gold is up by 450% since its 1999 low of US$252.50. So far this year, the yellow metal has gained by 43%, its best yearly performance of the whole nine-year period.

Whether or not gold’s bull market has further to go is a question that generates feverish debate. While the metal is well above its previous (1980) cycle high in nominal terms, it still looks moderately priced when measured against an ever-inflating money supply, equities, or inflation, points out U.S. analyst, Barry Ritholtz. As concern intensifies over the ability of sovereign issuers to service their debt loads, there is steady demand from investors to hold gold - the monetary asset whose value cannot be inflated away and which is no one else’s liability.

According to Martina Gruber, Managing Director of Deutsche Boerse’s commodities section, the mini-panic in May over a possible Greek sovereign default led to a surge in demand for exchange-traded gold instruments. The German exchange’s commodities unit is the issuer of Xetra-Gold, which added 2.5 tonnes to its gold holdings (that’s worth over US$110 million at current prices) on a single day in May, said Gruber.

Other managers of European gold exchange-traded products also saw dramatic inflows in May: ETF Securities’ Physical Gold ETC added 17 tonnes of gold (worth US$750 million) that month, ZKB’s gold ETF and ETF Securities’ Gold Bullion ETC each accumulated 8 tonnes (worth US$360 million), while Xetra-Gold and the Julius Baer Physical Gold ETF both gained 5 tonnes (US$225 million) in metal holdings.

Europe’s politicians and central bankers, in conjunction with the International Monetary Fund (IMF) came up with a rescue package in May for Greece and other indebted sovereigns, dousing bond market speculation of an imminent default. Gold investors remain sceptical, however, of policymakers’ chances of success. European gold exchange-traded products’ holdings have increased substantially further in the six months since May: ZKB’s gold ETF, the region’s largest bullion tracker, has added another 20 tonnes of gold, for example: another, Source’s physical gold ETC, has almost doubled in size since May, from 10 to 19 tonnes of metal.

Worldwide, assets held by gold exchange-traded products also continue to rise. GLD, the SPDR Gold Trust and the world’s largest gold ETF by some margin, has added over 150 tonnes of bullion to the vaults of its custodian, HSBC, so far in 2010, taking the fund’s value to nearly US$60 billion. GLD is the world’s second-largest exchange-traded fund, following the same issuer’s S&P 500 index tracker.

Collectively, the world’s gold ETPs owned nearly 70 million ounces (or 2150 tonnes) of bullion, worth US$96 billion at the end of November. Putting that into perspective, only four individual governments (the US, Germany, Italy and France) own more in the form of official reserves.

Global Gold ETP Holdings Ounces

Global Gold ETRP Holdings US$



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