When the World Gold Council launched a gold-backed exchange traded fund six years ago, expectations were low. Analysts weren't sure investors would take to the new product; mostly, the council was just trying to remain relevant to its members, gold producers.
The worries were misplaced. Today, the Council's SPDR Gold Trust is a $59-billion (U.S.) fund with roughly one million investors and 42,000 ounces of gold tucked away in warehouses, making it the largest private gold owner in the world. The fund opened the gold market to retail investors by allowing them to bypass the cost and cumbersome process of buying and storing gold bars or coins themselves. Each SPDR share represents one-tenth of an ounce of gold, and the shares have repeatedly smash new highs in recent months as the price of gold has climbed above $1,400 (U.S.) an ounce.
That success has spawned many similar products, including ETFs for silver , platinum and palladium . Now the focus is on base metals, especially copper.
There are fears that copper ETFs could artificially drive the price of the metal higher as funds buy copper to back their shares. Those fears are based in part on the experience with gold ETFs, which have sent demand for gold soaring in recent years. Purchases of gold to back ETFs nearly doubled last year from 2008 to 617.1 million tonnes, according to the World Gold Council.
In dollar terms, ETFs bought $18.4-billion (U.S.) worth of gold, compared with $8.9-billion in 2008. And demand from investors is still climbing. Overall investment demand, which includes gold bars and coins as well as ETF purchases, jumped 19 per cent in the third quarter of 2010 from a year earlier, according to the council.
Regulators in the United States and Britain have also expressed concern that a growing number of these types of commodity-based ETFs operate beyond regulatory scrutiny. Typically, many ETFs have bought futures contracts on commodity markets and rolled the contracts over as they expired. But physically backed ETFs, like the copper funds proposed by JPMorgan and the others, don't use commodity futures. Instead, they buy the commodity directly and store it in warehouses.
Paul Waldie