ETFs not to impact physical gold demand

Gold exchange-traded fund (ETF) had created a new class of investors across the globe and there was hardly any room for a shift from the existing institutional or retail physical investors in the yellow metal to this new asset class in India, said Jeffrey M Christian, managing director of CPM group, a New York-based commodities research house.

Jeffrey was speaking to mediapersons at the launch of the CPM group's 'Gold Yearbook 2007' in Mumbai on Thursday.

A section of traders has become apprehensive of the country's first gold ETF that debuted on the NSE recently, fearing that the new investment option will drive away the demand for the yellow metal in the physical form.

Elaborating on gold ETF as a type of diversified portfolio investment, Jeffrey said gold ETFs held a total of 20,252,673 ounces of the precious metal globally in 2006. The demand for gold was partly driven by gold ETFs, which had become an important part of any investment strategy in the last few years, he added.

Investors bought shares backed by 7,912,354 ounces of gold in 2006, representing about 18.9 per cent of the total investor demand for physical gold. Gold ETFs had clearly become a major part of the investment strategy, said Jeffrey, adding that much of the gold was stored against these shares in allocated accounts of London's banks.

Contrary to fears of ETFs replacing the demand for physical gold, investors had bought 241.5 million ounce of physical gold from 2001 to 2006. Never before in the history of the precious metal had so many investors, spread throughout a truly global array of geographic and demographic universe, spent so much money buying so much gold over such an extended period of time, he added.

This was the seventh year of continued bullish prices of gold, unlike the previous trends of a two-year bubble, and the buoyancy was mainly sustained by institutional investors driven by an urge for long-term profits, a clear change in sentiment from short to long term, Jeffrey pointed out.

Citing several advantages of investing in the yellow metal such as portfolio diversification, hedging against inflation and currency risks and safe-haven investment, Jeffrey said factors such as inflation in the US economy, geo-political risks and supply-demand factors could not be ignored while taking a call on price forecast. Jeffrey forecast gold price to remain high at an average of $620 this year as against $606 last year.

The demand for gold fabrication is estimated to grow by 8.2 per cent to 79.6 million troy ounce (mtoz) this year as against 73.6 mtoz in 2006.

According to Jeffrey, mine production across the globe is expected to grow by 4 per cent to 63.8 million troy ounce as against to 61.4 million ounce last year. The supply of the secondary product is also set to increase by 4.6 per cent to 27.5 million ounce from 26.3 million ounce last year. Industrial demand is likely to increase by 2.5 per cent to 10.5 million ounce in 2007 from 10.2 million ounce last year.