Exchange-traded products flows show value of gold

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Precious Metals - November 2013

Recessions come in all shapes and sizes, but the downturn since the financial crisis of 2008-09 has been particularly long and nasty. This should not come as a surprise. History shows that recessions following financial crises tend to be both deep and durable.

With gold’s long-standing reputation as a safe haven and an inflation hedge, do its diversification arguments still stack up?

Silver has fallen disproportionately, presenting an opportunity to pick up a bargain, according to Boost’s head of research Viktor Nossek, who explains that investors in exchange-traded products (ETPs) have remained bullish on precious metals.

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“The gold bears were the main drivers behind the recent inflows into gold ETPs. In August, we saw the biggest inflows in our short gold ETP since 2011,” he says.

Independent research and consultancy firm ETFGI data reveals that the top-selling European-listed gold ETCs were db Physical Gold ETCs, listed in London and Switzerland. Both vehicles, each with $461.1m (£286.5m) of assets under management, saw inflows of $169.8m year-to-date (to the end of the third quarter of 2013) and $4.6m of inflows in September alone.

David Patterson, head of UK retail distribution for ETPs at Deutsche Asset & Wealth Management, says the attraction to gold is clear given its historical role as a traditional safe haven and its importance in the reserves of global central banks, being transferable, transportable and highly liquid.

So is it simply a case of he who is first to market wins? Mr Patterson explains: “There will always be demand for gold as a primary commodity investment. With later entrants, you can see why they might struggle against those that have market share.”

Price aside, he says hedging out currency risk has been a key differentiator, citing db’s euro-hedged product, which has drawn in $760.4m since launch, according to ETFGI.

But as db Physical Gold GBP Hedged ETC saw outflows of $5.8m year-to-date and db Physical Gold Euro Hedged ETC lost $482.4m, with $9.3m moving out in September alone, Mr Patterson suggests some investors might have repositioned, taking the view that the dollar will strengthen and therefore might want that dollar exposure.

The growing appetite of absolute return funds to gain more exposure to gold and precious metals is another factor, he suggests.

Henderson’s multi-asset fund manager James de Bunsen thinks the story moves beyond just gold.

“We currently have a small weighting to gold. In the long term it’s a decent inflation hedge, a store of value in a world where currencies are being competitively devalued through quantitative easing and a good diversifier.

“Nevertheless, it is undeniably hard to value and, as it pays no income, you are not compensated for holding it. It is also clearly not a safe-haven asset, as attested by recent volatility.”

He is taking interest in other precious metals such as platinum and palladium, which share gold’s characteristics but also have significant industrial usage and interesting supply-side dynamics.

ETF Securities analyst Nitesh Patel agrees. The group, which boasts the best-selling Physical Silver products – taking in $122.7m year-to-date, yet losing $35.7m in September alone – saw its Physical Platinum and Physical Palladium products lose $184.6m and $58.4m respectively so far in 2013. September outflows were $7.9m and $6.8m.