Exchange-traded products flows show value of gold

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.

“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.

Mr Patel says: “Several things are going on here. Firstly the silver price going into September bottomed, showing quite a variation against gold. At the end of August, silver looked cheap, so people piled in but by mid-September a lot of people took profits and sold out.”

Platinum and palladium are predominantly mined in South Africa and Russia, which can lead to concentration of risks, he says. While labour tensions in the former have been an issue, the worst seems to be over, while in Russia the government’s massive stockpile of palladium has dwindled.

So, is it just about price?

Mr de Bunsen says: “The key things we look at are structure and counterparty risks, price, and liquidity or trading costs. We reassure ourselves that we are holding the physical metal and not taking on any unwanted credit or counterparty risk.”

Sam Shaw is a freelance journalist

ETPS

THE TOP SELLERS

Gold

db Physical Gold ETCs, listed in London and Switzerland.

 $461.1m (£286.5m) of assets under management

$169.8m year-to-date inflows

 $4.6m in inflows in September

Silver

ETFs Physical Silver

 $122.7m year-to-date inflows

 $35.7m in outflows in September

Platinum

Platinum Source P-ETC

 £134.3M year-to-date inflows

 $6m in inflows for September

Palladium

Palladium Source P-ETC

 $51.9m year-to-date inflows

 $2.7m in inflows in September