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Nick from Sharelynx
forwarded two announcements to me today, one on Sprott's new Silver fund and Japan’s first
precious metal ETF (actually four of them) where the metal is stored in
Japan. The Mitsubishi series name is "Fruit of Gold", gotta love
that.
I have been tracking all of these ETFs as well as other publicly reported
storage facilities (eg GoldMoney) since 1999. I gave this proprietary data to
Nick to combine with his extensive data sources to create a unique time
series of these products, which you can find here if you are a
subscriber (and if you're not you should be otherwise you are operating in
the dark re data on the precious metals markets).
I'm sure we will shortly have some article by the gold haters that the growth
of these ETFs are another bubble top indicator. I disagree, and would answer
by quoting from a strategic paper I wrote for the Mint's Board in 2001, which
probably sounds a bit old hat now:
The demonetisation of
gold led to an emphasis on gold as an investment and this was reinforced
further with the development of the Krugerrand and subsequent coin programs.
However, from this promising start, gold has failed to move with its financial
competitors and has thus lost its "market share" of the average
consumer’s investment dollar.
What occurred with other
investments was a shift from physical to virtual. For example, consumers
moved from cash to credit cards, from bank passbooks to account statements,
from physical share certificates to electronic registration of holdings.
Consumers clearly became comfortable with the virtual form of investments and
the convenience they offered. In contrast, however, gold remained physical
and therefore became relatively more difficult to purchase and hold.
The result of gold
remaining physical was that fewer and fewer intermediaries were willing to
offer it to their customers. The two key intermediaries – banks and
brokers – stopped offering direct investment in gold because other
investment classes, such as shares and mutual funds, were easier to sell.
This shrinking of gold’s distribution channels (in some countries it is
only available from coin dealers) is it considered to be a contributing factor
in the marginalisation of gold as an investment class. Hence, it is not
surprising that gold is no longer considered part of a consumer’s
investment portfolio.
The arrival of the
Internet is accelerating the move to virtual investment categories. Customers
will expect to interact through the Internet, especially for "low
touch" products such as shares, insurance, and gold bullion. Customers
will also increasingly move their banking and investment management online.
However, this move will still involve intermediaries, it is just that the
intermediaries themselves will become virtual, mirroring the change that has
occurred in the financial products they sell. For example, instead of
telephoning their broker, investors will trade shares directly with ComSec or
Charles Schwab.
If gold is to regain a
position on the average investor’s portfolio it must be on the
intermediary’s "product list". The response of the gold
industry to the move to virtual forms of investment does not address this
issue. Virtual gold is only available via direct-to-consumer models, such as
Perth Mint Depository Services or online from businesses such as Kitco.
However, this approach requires consumers to find and set-up an account
directly with the business concerned. These services are also not suitable
for use by key intermediaries such as banks and brokers. As a result, gold is
not truly "online" as far as average investors are concerned
– it needs to be one of a number of investment options available when
consumers ring or log on to their broker.
To do this gold needs to
be virtual, as shares are. The difficultly is that, unlike shares or mutual
funds, gold is inherently physical – failure to insist on physical
backing against customers’ holdings leads to the temptation to issue more
"paper gold" and with infinite supply, the price and value of gold
becomes meaningless. Physical backing is the key to marketing gold as safer
than mere paper assets, as something with intrinsic value.
The listing of ETFs on stock exchanges in my view begins the process of
legitimising gold as an investment class in the minds of the average
investor. However it is a necessary but not sufficient step - a case still
has to be made for gold, it still has to be promoted. But at least it is
"on the shelf".
The other advantage of ETFs is that it brings transparency to what is an
otherwise very opaque market. While ETF's only account for 6-7% of estimated
privately held gold, this percentage will increase over time, giving greater
insight into the mood of gold investors. Well possibly greater insight,
depending on how well analysts read the entrails of changes in ETF holdings.
Bron Suchecki
Goldchat.blogspot.com
Bron Suchecki has
worked in the precious metals markets since 1994, when he joined the Perth Mint
as an Administration Officer in their Sydney retail outlet. In 1998 he moved
to Perth to work in the then fledgling Depository division. He has held a
number of roles since then in the treasury, risk and governance areas of the
Mint.
All posts are Bron's personal opinion and not endorsed by the Perth Mint in
any way.
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