[DEBATE] : Gold getting recognized as 'ultimate hedge'

[Riaz K. Tayob]

Gold getting recognized as 'ultimate hedge'
	
Submitted by cpowell on 01:40PM ET Friday, September 28, 2007. Section: 
Daily Dispatches

Flight to Gold Exchange-Traded Funds

By Ruth Sullivan
Financial Times, London
Friday, September 28, 2007

http://www.ft.com/cms/s/0/b7b1b582-6abb-11dc-9410-0000779fd2ac.html

A flight to the age-old safe haven of gold in times of market turbulence 
is appearing not just in spot gold, where prices came within a whisker 
of $740 a troy ounce last week -- its highest nominal level in almost 28 
years -- but is also spreading to exchange-traded funds, where investors 
have been showing an extraordinary appetite in recent weeks.

ETF Securities has seen money that is invested in its physically backed 
gold ETF increase 240 per cent in the past seven weeks. Its total assets 
under management in gold-backed exchange traded commodities exceeds $300 
million, while total assets under management invested in precious metals 
ETCs is above $500 million.

"There has been an increase in demand for ETCs linked to the price of 
commodities and particularly gold and precious metals. This demand has 
come from investors seeking to diversify their portfolios away from 
equities and bonds and into other asset classes," says Nik Bienkowski, 
head of listing and research at ETF Securities.

Independent studies have shown gold and precious metals have low to 
negative correlation with equities and in times of market uncertainty 
and stress he sees that the low correlation holds.

"Gold is increasingly seen as the ultimate hedge," says Hector McNeil, 
sales and marketing manager at ETF Securities. People are waiting to see 
how the market crisis will pan out, he adds.

Among the buyers are private bankers purchasing for capital protection, 
hedge funds keen to get an exposure to physical gold on a cost-effective 
basis, some multi-asset funds with wide mandates such as those operated 
by New Star, BlackRock, and Newton, and retail investors who like and 
understand gold, says Mr McNeil.

In addition to being seen as a safe haven, the ease of investing in a 
gold ETC is attractive, as well as its liquidity, which is drawn from 
the underlying market. "An ETC is the next easiest thing to stacking 
gold under your bed," says Mr McNeil. It provides investors with a 
return equivalent to movements in the spot price of gold, less a small 
management fee that accrues daily, he says.

Since July, gold has resumed its normal status as a safe haven, says 
Daniel Draper, head of Lyxor ETF for UK, Ireland and the Nordic region. 
"We have seen a real spike up in trading volumes and assets under 
management [in gold ETCs] since August 17 and again since the Fed cut 
its interest rate."

The Lyxor Gold Bullion Securities fund, designed to track the price of 
gold, last week stood at $2.118 billion and is the largest ETC that 
trades on the London Stock Exchange, he says. As well as short-term 
traders, Mr Draper is also seeing a lot of demand from asset allocators 
on a longer-term basis. At Exchange Traded Gold, a World Gold Council 
initiative, and the umbrella under which exchange traded gold products 
are developed and managed, Owen Rees, European business development 
manager, notes: "In the last few days we've seen six tonnes of gold come 
in our UK product with most of the interest coming from retail investors."

"There has been even stronger growth from the US, where our StreetTracks 
Gold Shares product has seen $1bn come in over the last few days," says 
Mr Rees. who attributes the flows to dollar weakness and the subprime 
mortgage crisis. "Gold is exceptionally attractive in the US at the 
moment," he adds.

The price of ETFs on the New York Stock Exchange is following the gold 
market, says David Burkart, a senior portfolio manager in commodities at 
Barclays Global Investors, the dominant global force in the industry. 
"We're seeing a flight to quality in gold with US currency concerns, 
portfolio diversification and petrodollar recycling also playing their 
parts."

However, he says the Gold ETFs in the iShares family of funds did not 
pick up until the end of August and early September. Growth and volume 
in silver ETFs picked up a little at the beginning of the credit crisis 
but "the real change we're seeing is in gold."

"A year ago, the size of these products was almost non-existent. Now 
we're managing over $5 billion just in commodity iShares," he adds.

In a report on ETFs compiled by Morgan Stanley last month, assets in 
ETCs across all commodities showed an increase of 37 per cent on a year 
earlier to $22.88 billion.

"People have watched volatility in the equity markets in the last couple 
of months and been concerned about quant models. Now they are looking 
for a safe place to put their assets," says Deborah Fuhr, a managing 
director at Morgan Stanley.

Investors are also showing interest in mixed metals baskets, including 
platinum, palladium, and silver. ETF Securities says investors are 
typically showing keen interest in baskets of precious metals with about 
40 per cent in gold, 25 per cent in silver, and the rest divided between 
platinum and palladium.

As interest in ETCs grows, the product offering is widening. In the next 
few weeks, ETF Securities will issue a new range of forward ETCs in 
response to demand from investors for more choice, access to a different 
part of the commodities futures curve and to longer dated futures. The 
new ETCs will provide exposure to commodity futures prices that are 
linked to the Dow Jones-AIG Commodity three-month forward indices.

The increased demand is also coming as knowledge about commodities 
investing grows.