Gold ETF Knocks US Stock Tracker Off Its Perch
Wednesday, August 24, 2011

SPDR Gold Shares has become the largest exchange traded fund (ETF) in the world by assets, signifying a worrying lack of investor confidence in equity markets and the global economy in general.

The gold ETF closed on Friday with assets of USD76.7bn, surpassing the SPDR S&P 500 ETF, which tracks the US S&P 500 stock index, and which, until now, has been by far the most popular such fund with investors. A further USD1.2bn in assets was added to SPDR Gold Shares on August 22 as the price of gold continued its remarkable rally, breaching the USD1,900 per ounce mark on Tuesday morning to reach yet another record level.

In many ways the surging popularity of the gold ETF, which is traded on the New York Stock Exchange, is no surprise. Gold has traditionally been the safe haven of choice for investors during troubled economic times. The price of the metal has surged in recent weeks as the debt crisis in the eurozone has intensified, the US has lost its top-notch credit rating and fears of a 'double dip' recession looking increasingly realistic.

According to State Street Global Investors, which markets SPDR Gold Shares, the fund has returned 21% since its inception in 2004. However, in the 12 months which ended July 31, 2011, the fund returned a massive 38.77%.

An ETF is an investment company with shares which trade intraday on stock exchanges at market-determined prices. Investors can buy and sell them in the same way as they currently trade in equities on an exchange. One advantage of the gold ETF is that investors do not have to take physical delivery of the gold itself.

While the gold price rally is being driven by demand for the metal from across the globe, recent data from the World Gold Council suggests that demand has been especially high in certain parts of Asia, namely India and China. According to the Council, these two markets accounted for 52% of total bar and coin investment and 55% of global jewellery demand in the second quarter of the year. However, global gold demand in the second quarter of 2011 actually fell 17%, to 919.8 tons, compared to the the second quarter of 2010.

Swiss bank UBS has raised its one-month gold forecast to USD1,950 per ounce, and prices are expected to stay strong as uncertainty continues to pervade the financial markets. However, there is evidence that some investment managers are now becoming a little nervous and reducing their exposure to the metal. Dennis Gartman, the economist and editor of the Gartman Letter, revealed according to Bloomberg that he is reducing his gold holdings because the market has become "too frothy", although he remains bullish about the gold market in the long-term.