Gold ETFs Won’t Lose Their Luster This Year
By GCRU Gold News on Monday, August 1 2016, 01:00 - Permalink
Whether ETF flows are driving gold prices or merely following them is hotly debated. In reality, both claims can be true, depending on market conditions. “It’s a feedback loop,” says Juan Carlos Artigas, the World Gold Council’s director of investment research. “Higher prices encourage more ETF investors to look into the asset class, and when more investors look into that, gold’s price goes up.”
Whether or not gold experts believe that derivatives such as futures—or “paper gold,” as gold bugs derisively call them—count as part of the gold market weighs heavily in their assessment of ETFs’ influence. ETFs like GLD must hold all of their assets in physical bullion in vaults. But most gold derivatives are settled in cash and are backed by little if any bullion. It’s rare that a derivative buyer requests physical delivery of gold for a futures contract.
In an article written for shareholders in January, manager John Hathaway of the Tocqueville Gold fund (TGLDX) calculated that the volume of gold derivatives traded at the London Bullion Market Association on a daily basis had a notional value of 3,248 tons of gold, compared with a daily supply of physical gold from miners and recyclers of 10.5 tons—a ratio of 309 times the daily supply. Most of that derivative trading was on paper only, he surmised, and had no actual connection to the physical metal.
Since ETFs are backed completely by physical bullion, Hathaway predicted that a significant inflow into them could cause a “short squeeze” on such derivative traders as the dearth of real gold in vaults ostensibly backing futures contracts became apparent. Now, with gold up so much this year and ETF flows on a tear, that call looks prescient.
But Milling-Stanley believes that futures are still a relevant price driver: “I recognize that ETFs can, from time to time, play an important role in gold-price determination, but on average, gold-backed ETFs trade less than $2 billion per day, while the global over-the-counter derivatives market trades on average $250 billion.”
Gold ETFs Won’t Lose Their Luster This Year
