Gold Trust Insight: Gold Production (GLD, IAU, SGOL, AGOL)
Christian Magoon: Gold trust products are the largest products in the gold ETF space. Gold trust ETFs include the SPDR Gold Trust (NYSEARCA:GLD), the iShares Gold Trust (NYSEARCA:IAU), the ETF Securities Swiss Gold Trust (NYSEARCA:SGOL) and the ETF Securities Asian Gold Trust (NYSEARCA:AGOL). All of these products actually hold gold bars, store them in a vault and then use the bars to back any shares the gold trust issues. The share price of these ETFs is simply the price of gold, less fees and expenses of the ETF, times the amount of gold being stored. This number is then divided by the number of ETF shares outstanding.
GOLD TRUST RETURNS: TWO KEY FACTORS
The two factors ultimately effecting the price of gold and thus the returns of gold trust ETFs are demand and supply. Demand is the most dynamic factor of the two. The three primary sources of demand for gold in order of importance are jewelry, investment and electronics. At times these factors can work against each other. For example, in an economic downturn the demand from the jewelry segment may slide significantly as discretionary purchases by consumers are postponed. On the other hand, demand for investment in gold via coins or even gold trust ETFs may skyrocket as gold is often considered a safe haven investment during troubled economic times.
Supply of gold is the least dynamic of the two factors affecting gold prices. Gold is notoriously hard to locate and costly to mine. Because of this, the world’s supply of gold is relatively small. In fact it is estimated that all the gold ever mined by humankind could fit into three Olympic sized swimming pools. So where’s the gold coming from? Here’s a chart showing production of gold by country in 2011.
As you can see, China is the world leader in gold production, delivering around 355 tons of gold in 2011. Australia is second followed closely by the United States.
Going forward production of gold must increase as demand for the yellow metal is exploding. The increase of gold trust ETFs, electronic devices using gold and the rise of the middle class in China and India are all factors pointing to the need for even more gold supply.
Christian Magoon is Publisher of GoldETFs.biz and IndiaETFs.com. He is also CEO of Magoon Capital, a strategic consultant firm to asset managers. Christian Magoon is an ETF insider, having launched over 40 ETFs in the United States to date. A widely recognized thought leader on finance and market issues, Christian regularly contributes to many financial media outlets. Prior to forming Magoon Capital in 2010, Christian was President of Claymore Securities (now Guggenheim Investments), where he built one of the fastest growing and most innovative ETF businesses in the country, gathering more than $3 billion in AUM in three years. He launched more than 40 ETFs, introducing many “firsts” to the U.S. market, including the first Frontier Markets, Sector Rotation, Solar Energy, Timber, BRIC and suite of China focused ETFs. Christian consistently provides his industry insights and knowledge as a commentator in the U.S. media speaking publicly on macro investment issues and ETF related topics. Follow him on Twitter @ChristianMagoon. In 2008, he was named by Institutional Investor News as one of the five people to watch in the U.S. ETF marketplace. In 2011, Financial Planning magazine dubbed Christian an “ETF Pioneer.”