Physical gold ETCs should benefit from continued EM central bank buying

May 29th, 2012 | By | Category: Commodities

Data released by the IMF last week shows that emerging market central banks have continued to buy gold in large quantities this year.

According to the latest IMF statistics, which were highlighted in a recent ETF Securities report, Mexico added around another 3 tonnes in April to it near 17 tonne buying spree in March, while Kazakhstan purchased 2 tonnes. The Philippines, which reported March data, added 32 tonnes to its reserve, the largest official purchase in over a year since Mexico’s 78 tonne purchase in 2011.

Physical gold ETCs should benefit from continued EM central bank buying

Emerging market central banks have been acquiring gold as they look to diversify their reserves away from traditional reserve currencies.

Emerging market central bank buying has become a major theme over the past few years as they look to diversify their reserves away from traditional reserve currencies such as the dollar and in particular the euro. This buying has become a key support for the gold price.

Importantly, emerging market central banks still only have a small percentage of their reserves allocated to gold, meaning continued buying can be expected. For example, Brazil and China, respectively, have only 0.5% and 1.7% of their central bank reserves allocated to gold. Similarly, India and Russia have only 10% and 9.3% allocated to gold, respectively. This compares to a euro-area average of 63.4%.

Physical gold buyers – whether they be central banks, institutional or private – also tend to be long-term investors who own the precious metal because it provides a method of wealth preservation. Key to this is gold’s finite supply and the fact that, unlike fiat (paper) currencies, it cannot be devalued by firing up the printing presses.

While some investors, perhaps the most famous of whom is Warren Buffett, argue that gold is in a bubble, others note that, when adjusted for inflation, the previous record high of $850/oz achieved back in 1980 would translate into a gold price of around $2,400/oz today, which, when compared to the current price of circa $1580/oz, suggests that gold is a long way off bubble territory.

Gold bulls – or ‘gold bugs’ as they’re known – also argue that the yellow metal is destined to rise much further than this, as the default reaction by developed world central banks is to inject liquidity into the markets through quantitative easing – in essence money printing.

For investors wanting to follow the lead of emerging market central banks or indeed capitalise on their continued gold buying, the following physically-backed ETCs are, aside from buying bullion itself, the most direct route into the metal for UK-based investors:

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%.

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