Gold: King of Commodity ETFs in 2012

Gold: King of Commodity ETFs in 2012Gold was the king of commodity exchange-traded funds (ETFs) in 2012. At the end of the year, assets worth $199.8 billion were under management in commodity ETFs, representing an increase of $29 billion over 2011′s assets under management (AUM). That asset increase was dominated by gold, which increased by $24 billion, bringing total assets in gold ETFs to $146.6 billion, Nick Brooks, head of research and investment strategy at ETF Securities, told Gold Investing News. 

Brooks pointed out that gold ETFs witnessed a particularly strong performance in the second half (H2) of the year.

Q3 was by far the strongest quarter for these products in 2012. Gold ETFs saw global net inflows of over $7.6 billion during that period. Over $4.3 billion of that amount was invested in September, the month in which the European Central Bank introduced Outright Monetary Transactions and the Fed followed up with the announcement of its third round of quantitative easing.

With over $4.5 billion flowing into gold ETFs between October and December, Q4 was also a strong quarter.

Brooks attributed the significant inflows in H2 to concerns about the fiscal cliff and the debt ceiling. On top of that were continuing concerns about sovereign debt issues in Europe, he said.

North Americans tend to invest the most in gold ETFs. That held true during the last six months of 2012, with inflows from the region totaling more than $6.89 billion. Inflows from Europe totaled almost $5 billion and the rest of the world made net investments of $376 million.

Psychology of gold investors

This strong performance occurred despite poor gold price performance in that latter part of the year, Brooks pointed out.

ETF investors displayed an overwhelming preference for gold even though its 7.1-percent gain for the year meant that it underperformed its precious metal peers — silver, platinum and palladium — which gained 9 percent, 9.9 percent and 7.5 percent respectively.

“Gold is special,” Brooks explained. “ETF investors in gold tend to focus very much on the big structural issues. They are less affected by short-term news. They don’t really care if the FOMC [Federal Open Market Committee] is talking about the possibility of ratcheting back on quantitative easing at the end of 2013. They are really focused on the fact that US debt is growing and that the US doesn’t yet seem to have a plan to deal with the debt issue in a serious way.”

“They [gold ETF investors] are very focused on Europe and the structural problem of competitive Southern European countries and Germany and what that may imply for the euro longer term. And until they see some kind of fix for that they are going to want to hold onto their gold ETFs. So they are very focused on the big picture,” he added.

Brooks said there is really no relationship between the gold price and flows into ETFs, except perhaps how much is purchased at a given time. Investors buy more when gold prices decline. When the price rises, sometimes they buy and sometimes they wait, he said.

ETF investors have earned the moniker “sticky money” for a reason. They do not generally take a tactical approach — such as abandoning gold for another metal that may be the hot commodity of the moment — to their investments in the market.

Some have suggested that the gold market is not readily attracting new investors. Brooks said he would argue that new players are entering the gold ETF space based on the growth in AUM over the past several years.

“Remember, these are fairly new products and many investors are still discovering them,” he said.

A trend that emerged in India seems supportive of Brooks’ argument. During the Diwali holiday season in November, which is considered an auspicious period for gold, ETF investments soared. Both the National Stock Exchange of India and the Bombay Stock Exchange held special Sunday sessions to facilitate trading of gold ETFs.

 

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.