Given that the largest precious metal industry gathering took place last week in Berlin, it was fitting that the price of gold set a new high. Those who are crying bubble are failing to recognise that the more recent high of US$1330 per ounce is still some way short of the 1980 high on an inflation adjusted basis.
One of the most notable developments in the gold story is the surge in investment demand through ETF’s such as Gold Bullion Securites (LON:GBS) . Whilst holding shares in gold mining companies provides the obvious leverage, holding physical gold as is the case with GBS ensures that investors are exposed to gold in a space isolated from the vagaries of equity markets.
This securitisation of bullion overcomes a number of issues that have previously arisen from investing directly in gold. Firstly, the bullion is held on trust to ensure that holders of GBS beneficially own the gold and not just a promise to pay in gold. Uniquely identifiable bars of gold are "allocated" to the trustee and beneficially belong to the investor. The gold held in the account is physically segregated from other metal held in the vault, and is not lent out and does not involve any derivatives. Secondly, the underlying liquidity of the shares is determined by the gold market so that GBS will always trade at or around net asset value.
The Daily Price formula for GBS is the spot gold price multiplied by one tenth of one ounce, less the management fee of 0.4% per annum. As of the 01st October, assets under management (AUM) at GBS stood at US$5.35 billion and in terms of volume, GBS holds 4,077,635 million ounces.
Recently released data from the World Gold Council (WGC) illustrates the rise to prominence of investment demand for gold. During the second quarter of this year investment demand for the yellow metal (534 tonnes) overtook jewellery demand and ETF demand posted a huge 414% year on year increase; the quarter on quarter increase was significantly higher. Having seen strong inflows in August and September we would expect a continuation into the third quarter.
The WGC also reported robust jewellery demand for this year’s second quarter (409 tonnes) which was extremely encouraging given the rise in price and the vulnerability of the global economy.…
