Gold Investment Trends: More Than Just The SPDR Gold ETF (GLD, IAU, SGOL, SLV)

Julian Murdoch:  World Gold Council reports strong investment interest in second quarter.  The World Gold Council tracks ETF flows, futures activity and the purchase of gold bars and coins, and reports on these investment trends each quarter. For the second quarter of 2011, gold investment continues to be strong — no surprise given the uncertainty of global economics.

Gold Price And Performance
If all you followed were the flows in and out of the SPDR Gold Trust (NYSE:GLD), perhaps by following our weekly reports, you might think the last quarter was a disaster for gold. But you’d be wrong, or at least myopic.

The price of gold averaged $1,507.38 during the second quarter — up 8.7 percent quarter- on-quarter, and 26.2 percent year-on-year. In fact, gold measured in U.S. dollars outperformed major bond, equity and commodity indexes in developed as well as emerging markets.

In fact, gold’s one of the only bright spots in commodities, as prices in the assets class took huge hits in Q2, with a big sell-off occurring between April 29 and May 6.

For a larger view, please click on the image above.

Gold’s own drop was a modest 4.4 percent. Platinum performed similarly, with a fall of 4.6 percent, but other commodities were not as restrained. Copper lost 6.8 percent, oil dove 12.9 percent and silver (NYSE:SLV) had the biggest drop of all, with a staggering loss of 25.6 percent.

In the face of sell-offs such as these, gold’s unique standing as a safe haven investment really shined through, which may be attracting investors.

As most readers know, there are many ways to invest in the yellow metal. Let’s take a look and see what the WGC says about each one.

ETFs tracked by WGC continued to experience strong inflows during the second quarter, even as the price of gold rose. An additional 45.6 tonnes of gold flowed into ETFs globally, a 2.2 percent increase, which brought their collective holdings to 2,155.3 tonnes, worth $104.3 billion.

For a larger view, please click on the image above.

Just where are those tonnes going? More than half of the net inflows of gold were into European ETFs, with Julius Baer Physical Gold, the ZKB Gold ETF and DB Gold ETC accounting for 63 percent of the 29.2 tonnes that went into European funds.

Domestically, the iShares Gold Trust (NYSE:IAU), often considered the also-ran in the U.S. gold ETF race, experienced inflows of 19.0 tonnes. The SPDR Gold Shares (NYSE:GLD) bucked the trend and posted a small outflow of 3 tonnes, though it remains the gorilla of gold ETFs with 1,208.2 tonnes of gold held as of June 30, which makes the ETF’s holdings equivalent to the world’s 10th-largest central bank. While it’s impossible to survey every buyer, some investors may have grown weary of paying State Street 40 bps a year to stick gold in a vault, when BlackRock’s more than happy to take 25 bps in IAU.

Beyond buying shares of the various ETFs, many investors choose to trade options on the ETFs. Being the largest, the majority of options are GLD options. WGC states, “Trading volume measured by outstanding call and put contracts on GLD reached a new high of 16.7 million contracts.”

Physical Gold Bullion, Other Investment Vehicles
While the ETF gold market is large, the global over-the-counter (OTC) wholesale market accounts for most transactions of physical bullion. Hard and fast OTC statistics are hard to come by, but April estimates by the London Bullion Market Association put the amount of gold transferred between accounts at 22.5 million ounces a day, 4.1 million ounces more than the average daily volume in 2010.

The WGC notes that anecdotal evidence suggests that in addition to increasing their interest in ETFs, European investors are accessing gold via the OTC market as well. You can thank the prospect of a Greek debt default and Italy’s own financial implosion for Europe’s increased interest in gold any way they can get it.

In the major gold countries, such as India and China, gold investment has spread beyond direct purchasing of the metal. In India, the high-inflationary environment has increased the launch of gold-backed savings and investment products such as mutual funds that only invest in gold ETFs, as well as hybrid funds that invest both in gold and equities.

In China, anecdotal evidence points to continued strong demand for products such as the gold accumulation plan (GAP) offered by the Commercial Bank of China (ICBC).

Bars, Coins And Jewelry
The second quarter is not traditionally a peak gold-buying season in China, but Shanghai saw 205.3 tonnes of physical gold delivery (bars and coins) during the second quarter — 14.6 percent more than that time last year. Hong Kong also experienced healthy demand, with customers coming from mainland China as well as other nearby countries. Though the official Q2 numbers won’t be released until the Gold Demand Report comes out in mid-August, the WGC says that Chinese jewelry demand from traditional customers remained strong. The report also noted that new customers are being drawn into the jewelry market by an emphasis on design and craftsmanship.

In India, there were stories of coin stocks running out during the holiday of Akshaya Tritiya, though the annual festival season does not begin until August. Gold demand is expected to remain strong as the festival season gets under way.

Official Sector
Finally, many central banks around the world, especially emerging economies, are increasing their gold reserves — a trend that just recently had been going in the other direction. In fact, due to little selling from European central banks, the net global central bank purchases during the first two quarters of 2011 are higher than seen in all of 2010.

Conclusion? Doing Just Fine, Thank You.
The moral of the story here is to, as always, look under the hood. Many investors saw exotic headlines about the decline of interest in GLD and assumed it meant that gold demand was softening worldwide. This created a head-scratcher while looking at the strong price action in the quarter. But under that hood, we find an engine of global demand that’s purring like a kitten.

Written by Julian Murdoch From Hard Assets Investor (HAI) is a research-oriented Web site devoted to sharing ideas about hard assets investing. The site has been developed as an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures and gold (the three major components of the hard assets marketplace). The site will focus on hard assets investing without endorsing or recommending any particular investment product.  

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