Greece has avoided the immediate worst-case scenario, but Spain is now the epicentre of the crisis; while at the same time weaker US growth and inflation prints are opening up room for the Fed to consider implementing another round of QE, write Martin Arnold (Senior Analyst) and Nicholas Brooks (Head of Research and Investment) of ETF Securities.
Long gold ETCs last week recorded their fourth consecutive week of inflows, taking in $95m, bringing total inflows to $550m over the past month, according to data from ETF Securities.
Greece voted in the pro-reform New Democracy party by a decent margin on Sunday, reducing the risk of an imminent break-up of the euro. Spain, however, is now contending with 10-year government bond yields near 7%, a level that threatens to drive the country into a self-perpetuating debt confidence crisis.
The situation in Spain is of particular concern as it follows a €100bn bank bailout loan package only two weeks ago, indicating that only extreme measures have a chance of pulling Spain bank from the brink that Greece has temporarily stepped back from.
If the European authorities and the ECB do not step in forcefully, the crisis risks spiralling out of control. At the same time, weaker US growth and inflation prints are opening up room for the Fed to consider implementing another round of quantitative easing (QE).
Both of these scenarios are likely to be bullish gold and this has been reflected in rising physical gold ETP purchases and increasing net long positions in gold futures. Indeed, long gold ETCs last week recorded their fourth consecutive week of inflows, taking in $95m, bringing total inflows to $550m over the past month.
Elsewhere, central bank gold buying continues to fill the physical demand gap. Sizeable demand for physical bullion from the official sector, especially emerging market central banks, is filling a demand gap in the gold market. With the Indian Rupee hovering around record highs against the US Dollar, and the onset of monsoon season, demand from the world’s largest jewellery market is almost absent.
Last week the Kazakh central bank announced its intention to lift the share of gold as a percentage of its foreign currency reserves to 20% from 15%. The central bank plans to do this by purchasing 24 tonnes of gold this year, up from 14.6 tonnes in 2011. Known global central bank purchases Jan-April this year total US$135bn.
Aside from buying gold coins or bullion, which entail significant storage and security costs, the most direct route into gold for UK-based investors is via physically-backed Exchange Traded Commodities (ETCs):
ETFS Physical Gold ETC (PHAU)
The ETFS Physical Gold 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. PHAU is backed by physical allocated gold held by the custodian (HSBC). All physical gold metal held with HSBC conforms to the London Bullion Market Association’s (LBMA) rules for Good Delivery. London listed. TER 0.39%.
iShares Physical Gold ETC (SGLN)
The iShares Physical Gold ETC is a physically-backed Exchange Traded Commodity (ETC) offering investors accessible, liquid and transparent exposure to the day-to-day movement of the price of gold, as per the London PM fix price. The security is backed by physical gold bullion held as allocated gold bars with the custodian, JPMorgan. 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%.
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%.