Central bank gold buying continues to support physical gold ETCs

Nov 27th, 2012 | By | Category: Commodities

Exchange-traded products (ETPs) based on gold have rallied strongly in the past few weeks. Much of the gains can be attributed to temporary political factors such as the US presidential election, EU budget talks and Greek bailout negotiations. However, one factor continues to provide longer-term fundamental underlying support to the gold price: central bank gold buying.

Central bank gold buying continues to support physical gold ETCs

Central bank gold buying continues to support the gold price.

In 2009 there was a dramatic shift in central bank buying patterns as they switched from net sellers to net buyers of gold.  As the chart from ETF Securities, a leading provider of commodity-related ETPs, shows, up until 2009 central banks were large net sellers of gold, often comprising up to 15% of total annual gold supply.

Since 2010 central banks have become large net buyers of gold, equivalent to around 10% of total supply.  This shift is highly significant, representing a nearly 25 percentage point impact on gold’s supply/demand balance.

Most of this buying is by emerging market central banks, which have become increasingly keen to diversify their assets and reduce their very heavy exposure to the US dollar and the euro. Given the large and growing debt and fiscal issues facing both Europe and the US, it is likely that this trend will remain in place for the foreseeable future and continue to provide underlying support to the gold price.

Official institution gold sales

Central bank gold sales

Indeed, central banks added another 40 tonnes of gold in October, according to IMF data, with emerging market central banks once again notably active in the market.

Brazil and Kazakhstan were some of the largest buyers, purchasing 17.2 and 7.5 tonnes, respectively. Brazil has raised its gold holdings to the highest level in more than 11 years.

Of course, the underlying motives driving central bank buying apply to institutional and private investors too. By buying gold, investors of any kind can take advantage of the benefits the precious metal provides, such as inflation protection, diversification, liquidity and security.

For investors looking to add gold to their portfolios, one of the most efficient ways to achieve this is to buy a physically-backed exchange-traded commodity (ETC), of which the main London-listed ones are detailed below. ETCs are broadly similar to exchange-traded funds (ETFs) and provide investors with a simple, cost-efficient and secure way to access physical commodity markets.

ETFS Physical Gold ETC (PHAU)
The ETFS Physical Gold ETC is backed by physical allocated gold held at the custodian (HSBC). All physical gold metal held with HSBC conforms to the London Bullion Market Association’s rules for ‘Good Delivery’. The ETC is designed to offer investors a simple, cost-efficient and secure way to access the gold market by providing a return equivalent to movements in the gold spot price less the relevant management fees. London listed. TER 0.39%.

Source Physical Gold P-ETC (SGLD)
The Source Physical Gold P-ETC provides physically-backed exposure to the performance of the London Gold Market PM Fixing Price in USD. Each Gold P-ETC is a certificate which is secured by gold bullion held in JP Morgan Chase Bank’s London vaults. London listed. TER 0.29%.

iShares Physical Gold ETC (SGLN)
The iShares Physical Gold ETC is a physically-backed security underpinned by gold bullion held as allocated gold bars with the custodian, JPMorgan. The ETC offers investors accessible, liquid and transparent exposure to the day-to-day movement of the price of gold, as per the London PM fix price. London listed. TER 0.25%.

db Physical Gold ETC (XGLD)
The db Physical Gold ETC is backed by a direct investment in physical gold and provide investors with exposure to the gold spot price via London Good Delivery Gold Bars. The issuer (Deutsche Bank) has direct and sole ownership of the gold which is stored in secure vaults in London (JP Morgan and Deutsche Bank). Each physical ETC security entitles the holder to a specified quantity of gold of the segregated pool owned by the issuer. London listed. TER 0.29%.

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