Investors buy gold ETFs in anticipation of QE3

Aug 29th, 2012 | By | Category: Commodities

The price of gold reached $1,674 per ounce last week – a four-month high, and a 4% gain for the week – as a result of speculation concerning a third round of quantitative easing in the US and further accommodative monetary policy in Europe.

Investors buy gold exchange-traded fund (ETFs) in anticipation of QE3, inflows into SPDR Gold Shares ETF (GLD) soar

Investors on both sides of the Atlantic have been buying gold ETFs in recent weeks in anticipation of QE3 in the US and further accommodative monetary policy in Europe.

With central banks on both sides of the Atlantic seemingly preparing to fire up the printing presses, some market participants are forecasting gold to soar in the coming months of 2012, as investors look at ways to preserve their real wealth.

“Investors need to wake up and realise that gold is not an investment but a vehicle for wealth preservation,” said Jonathan Rose, CEO of Capital Gold Group, a gold billion dealer.

“As the Federal Reserve hints at another attempt to stimulate the economy with a third round of quantitative easing (QE), investors who maintain long-term funds in dollar-denominated investments risk serious loss of buying power resulting from the inflation that follows. The time to buy gold is now, before QE3.”

Fed policymakers stated that further action would be needed “fairly soon” without evidence of a “substantial and sustainable” improvement in the economic recovery, in the latest minutes from the FOMC (the Fed’s interest rate setting committee) meeting ending August 1, 2012, that were released August 22. The next meeting takes place on September 12 and 13.

“If this endless money printing does not stop, the US dollar will not only continue to devalue, but inflation will accelerate at an alarming rate,” said Rose.  “Since it appears that QE1 and QE2 were unsuccessful in rallying our economic recession, I don’t hold much hope for QE3.  It will only do more damage to an already shrinking dollar.”

Rose added: “There is so much economic uncertainty surrounding the Fed, US economy, jobs, and the looming ‘fiscal cliff’, that I would not be surprised if gold exceeds $1,700 an ounce in the coming months.”

Meanwhile, in Europe, there is rising speculation that German officials are becoming more receptive to additional European Central Bank stimulus activities, with nascent indications of support for a potential fresh bond buying programme, as well as a further interest rate cut. Both these policies would likely be supportive for gold prices.

It’s no surprise, therefore, that investors have been piling in to gold. Indeed, physically-backed gold exchange-traded products (ETPs) in both the US and Europe have seen significant inflows over the past week or so.

SSgA’s NYSE-listed SPDR Gold Shares ETF (GLD), for example, which is the world’s largest physically-backed gold ETP, garnered net inflows of $1.26 billion last week. This represented the 11th largest net inflow in the ETF’s history and the biggest haul since late November of last year.

Among the investors buying gold ETPs have been prominent US-based hedge fund managers John Paulson and Geore Soros. Both billionaires raised their stakes in the GLD in the second quarter of 2012, according to a recent US Securities & Exchange Commission regulatory filing.

For Paulson’s firm, Paulson & Co, it was the first time the firm had increased its position in the ETF since the first quarter of 2009. Paulson & Co owned 21.8 million shares in GLD by the end of June, up about 26 percent from 17.3 million shares from March 31, according to the filing. Similarly, the filing revealed that George Soros had more than doubled his holding in the ETF.

It’s been a similar story in the UK. Hamish Baillie and Steve Russell,  managers of the Ruffer Investment Company, Tom McGrath, partner at Apollo Multi Asset Management, and Tony Lanning, director of multi-manager funds at Henderson are among those who have been adding to their allocations to gold ETFs in recent weeks, according to Investment Week.

For investors wishing to accompany these fund managers, the following physically-backed ETCs are, aside from buying bullion itself, the most direct route into the metal for UK and European investors:

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%.

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%.

Many of the above ETCs have cross-listings on European exchanges or comparable Europe-domiciled equivalents.

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