Gold ETFs: Will The Gold Bubble Burst Or Is It Buying Time? (GLD, GDX, GDXJ, IAU, SGOL, DZZ)
George Wolff: Could George Soros be wrong? The billionaire investor sold off 99 percent of his holdings in gold just last week. Soros walked away with $800 million, including a very large profit he made during gold’s extraordinary climb.
As the chart below shows, gold is now off its all-time high price of $1565 per ounce. Does the legendary Soros foresee further declines?
Soros isn’t talking, but it’s worth noting that John Paulson, the biggest investor in the SPDR Gold Trust (NYSE:GLD), has maintained his positions. That raises the question, what should average investors do if they hold a portion of their portfolio in gold?
A Message from the East
There’s no bigger market for gold in the world than India. Except for the new elephant in the room, China.
A few days ago China blew India out of the water as the world’s number one buyer of investment gold. That includes gold bars, gold coins, and other investments issued by Chinese banks.
Do not underestimate the importance of this news. Chinese investment gold demand has more than doubled. Chinese demand climbed to 91 metric tons during the first three months of the year. That’s up from only 40 tons a year ago.
But, what the newswires didn’t tell you was the whole picture.
What matters just as much as tonnage is the amount of real money China’s masses poured into gold. Keep in mind that gold was rising sharply in value over the past year. So, in dollar terms, the rise in Chinese spending on gold was even more stunning, jumping by 179 percent to $4.1 billion.
The World Gold Council was as surprised as anyone by China’s gold fever. The Council had predicted that China’s total gold consumption wouldn’t double until 2020. Now the council says that will happen much sooner.
It is true that investment gold doesn’t account for the whole market. India remains the world’s number one gold consumer because of its enormous demand for gold jewelry. But China is now a close second in the sector too, and gaining quickly.
Jewelry demand in China jumped to a record high during the first quarter of the year. Purchases of gold jewelry rose 21 percent during the first three months compared to the same period a year ago. That’s 143 metric tons of jewelry.
Will Asia’s ravenous gold appetite diminish? Not likely.
The Gold Council says people in emerging markets often see gold jewelry as an investment as well as an ornament. In China it is also a hedge against rising inflation – another reason that demand continues to grow. A report in the Financial Times suggests that Chinese demand for gold jewelry could surpass India this year, making China the undisputed number one buyer of gold in the world.
The Investment Outlook
Unlike the recent bubble in oil prices, gold prices are being driven by accelerating demand. Worldwide gold demand in the first quarter of 2011 rose by 11 percent year-over-year. Total consumption was just short of one thousand tons for the quarter.
What’s more, there’s a growing supply shortage. While demand jumped, the global gold supply fell by 4 percent despite increased production in China. (China is the world’s biggest gold producer.)
The Gold Council says a sharp increase in bullion purchases by central banks caused part of the drop in supply. Central bank and government gold purchases doubled to 129 tons during the first quarter. This year’s buying already exceeds the total amount governments bought during the first three quarters of last year.
Hoarding by consumers also cut into gold supply. A six percent drop in the supply of recycled gold reduced world supplies to 872.2 tons. That shortfall creates even more pricing pressure.
What does it all mean for investors? Gold demand seems certain to increase because of three main drivers:
- The weakness of the dollar and sovereign debt problems in Europe will increase the appeal of gold as a safe haven. That will boost demand for both investment gold and jewelry in emerging markets.
- Demand for gold used in the manufacture of high-tech products continues to rise.
- Inflation and government policy in China are driving an unprecedented surge in purchases of gold investments.
In fact, Beijing gave a new green light to investment in gold just this weekend. For the first time the Shanghai Gold Exchange will be permitted to issue ETFs to Chinese gold investors. China’s billionaires and common people will be now able to buy gold in the same way that George Soros or average investors like you or I can. That’s 1.3 billion potential new investors.
The bottom line is this. The booming world market creates at the very least a support level for gold prices. Even if gold prices don’t rise as quickly as they used to, investors should think about holding gold ETFs in their accounts much as they would about holding cash. In fact gold may be a safer bet than the greenback.
In a world of ongoing fears over U.S. and European debt, gold may continue to rise in value. It is highly liquid and in constantly growing demand. Rising prices may dampen demand, but so far that hasn’t happened.
In a nutshell, China and India have put a strong floor under the price of gold. The two population giants may now also raise the roof.
Related Tickers: SPDR Gold ETF (NYSE:GLD), Market Vectors Gold Miners ETF (NYSE:GDX), Market Vectors Junior Gold Miners ETF (NYSE:GDXJ), ETFS Physical Swiss Gold Shares (NYSE:SGOL), iShares COMEX Gold Trust (NYSE:IAU), PowerShares DB Gold Double Short ETN (NYSE:DZZ).
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