More than 700 tonnes worth $19Bn now held in gold ETFs

Both short-term factors as well as longer-term movements in supply and demand suggest the outlook for gold in the medium to long term is strong says WGC CEO.

Author: Atul Prakash
Posted: Monday , 19 Nov 2007

MUMBAI (Reuters) -

The investor base of gold exchange traded funds has been growing, with inflationary fears and uncertainty in the financial markets attracting significant inflows, the World Gold Council's chief executive officer said.

"We are seeing inflows from all types of investors who recognise this as a secure, low cost way to owning gold bullion without the additional costs normally associated with insuring, storing and transacting in physical gold," London-based James Burton of the industry-funded council told Reuters on Monday.

"While retail investors are an important component to the success of ETFs as they are traditionally long-term investors, we are also seeing investment from institutions, including pension funds, who are increasingly investing in commodities as a way of diversifying their portfolios, he said."

Speaking on the sidelines of a global precious metals conference organised by the London Bullion Market Association, Burton said that the funds attracted a significant amount of investment in recent weeks due to uncertain market conditions due to dollar weakness and nervousness in financial markets.

Strong fundamentals also encouraged investors to pour money into the products that are traded on stock exchanges. Investors do not need to take physical delivery of the metal as the issuers buy matching gold to keep in their vaults.

World Gold Council-sponsored gold ETFs now hold more than 700 tonnes of gold worth nearly $19 billion.

Gold holdings by New York-listed StreetTRACKS Gold Shares, the world's largest gold-backed ETF, hit a record high of 599.5 tonnes earlier this month before slightly falling to 588.74 tonnes last week. The fund has surged 45 percent in volume terms in the past one year.

STRONG OUTLOOK

Burton said both short-term factors as well as longer-term movements in supply and demand suggested the outlook for gold in the medium to long term was strong.

"Continued weakness in the U.S. dollar, inflationary fears fuelled by rising oil and unstable financial conditions have all been factors that have helped boost gold in the short term.

"In volatile and uncertain times, we often witness a 'flight to quality,' when investors seek to protect their capital by moving it into assets considered to be safer stores of value."

Spot gold hit a 28-year high of $845.40 an ounce earlier this month and was just $5 away from its historical high of $850, fixed in London in January 1980.

The metal was quoted at about $789 an ounce on Monday.

Burton said gold supply and demand fundamentals also remained strong, with a reduction in mine output in recent years and no new major gold finds by the mining industry.

"This is at a time when the demand for gold has continued to increase. Strong economic growth and sustained promotion in the key gold jewellery markets of India, China and the Middle East are leading to strong demand for gold jewellery," he said.

"Both institutional and retail investors are increasingly familiar with gold's portfolio diversification benefits, whilst they also have easier access to investing in gold through exchange traded funds." (Reporting by Atul Prakash; Editing by Peter Blackburn)