The smart money is quietly buying more gold
The herd is selling gold – so should you be buying, asks Richard Dyson.
By Richard Dyson
05 Jul 2013
Five or six years ago, few private investors were very concerned about the price of gold. Then came the financial crisis. When major banks were failing, a sense of apocalypse focused investors’ minds on the value of physical assets as never before.
But other factors were at work. The evolution of new investment vehicles and trading platforms suddenly made it easy for private investors to buy small parcels of real gold. With “physical gold” exchange-traded funds, for instance, investors buy shares quoted on the London Stock Exchange, where each share is backed by solid gold stored in a Docklands bank vault. You could buy and sell gold as easily as you could blue-chip shares.
As the crisis rumbled on, increasing numbers of private investors used these ETFs to speculate, or as part of their planned portfolios, so that from owning about 800 tons of gold in 2007, total ETFs owned almost 3,000 tons by 2012. The gains enjoyed by the investors during that period were terrific, sucking in yet more money, stimulating further appetite, and so on.
Now the gold price is in reverse and ETF investors are selling their holdings fast. There is a sense in which these investors’ actions are self-fulfilling, because although ETFs – big as they are – account for a small proportion of the total, global demand for gold, they play a large part in driving the price.
The World Gold Council (WGC), which collects a range of statistics about the gold market, said ETFs accounted for only 6pc of demand for gold. By far the biggest source of demand is consumer purchase in the form of bars and jewellery, at 72pc of demand.