We tend to shy away from writing about some of the precious metals particularly gold because as we say around here the story is a bit of a “yawn meaning it doesn’t take a rocket scientist to see that when the economy is shaky/risky (insert negative adjective here) or the dollar drops or quantitative easing appears imminent people (we really mean investors) tend to pour their money into commodities, particularly gold. As we said before, yawn. So given our penchant for trying to take a different angle on precious metals (and gold in particular), we caught up with Will Rhind, Head of US Operations for ETF Securities, “a leading promoter and issuer of ETF Securities exchange traded products (ETPs), specializing in commodities, with global assets under management of over $22 billion as of October 2010,” according to their website. We asked Will to share with us some of the market trends he sees as well as pick apart the argument that gold is somehow part of a bubble market.
MM: Can you tell us about some of the trends you are seeing in your own ETF funds along with some general trends you are seeing in gold?
ETF Securities: First, we’ve doubled our assets in “SGOL our flagship Swiss gold ETF since the beginning of July (to over $1b in assets under management). The fund began in September 2009. One of the interesting things to me is despite the media attention around gold we find that investors and clients are still under-exposed to gold. When you drill down, clients have a low or very low weighting of this asset class in their portfolios.
Investors who do have some exposure to gold on the other hand, are increasing their holdings because the momentum is there. In other words, long gold positions are increasing among certain clients. At the same time, those that aren’t long gold are starting to enter the market. I think the growth in SGOL has shown that we still see good demand for gold. Those that have stayed away from the gold market have needed to come into the market because of different reasons; requests from their clients, the economic outlook or because there is now risk perceived in not being involved in gold.
MM: Are we in a gold bubble market?
ETF Securities: I don’t see it as a bubble. How can an asset class that is so under-represented be a bubble? Those that say it are paying too much attention to certain elements of the media. When I look at an investor’s portfolio if I see only 0-5% of that investor’s net worth in gold, how could that possibly be a bubble? When you compare gold to real estate, technology stocks, or other infamous busts, overexposure typically led to that bust, not 1-5% allocations of personal wealth.
MM: What about pension funds? Are they over-exposed to gold?
ETF Securities: What weighting does gold have in the average pension fund? I’d be astonished if the average pension fund has more than 1% in gold. If there are any out there, I haven’t met them.
MM: The percentage of a portfolio argument makes sense but when people think of bubbles they think about the underlying price. After all, the housing market was a bubble based on [inflated] asset prices. How do you look at the underlying gold price itself?
ETF Securities: In real estate for example, we can say it was a bubble market because the price got away from fair value and that the majority who were participating in it did so using leverage or borrowing money they couldn’t afford. To my mind, nobody is borrowing money to buy gold. They are buying it with capital that they own. Gold is at an all-time high but just because it’s at an all time high it is not at an all time high in real dollars (inflation adjusted). If you step back from it when you start doing the forensic analysis, you should get to a position where you have an understanding of why we are seeing gold prices at these record levels.
We continue our discussion on ETF trends with Will later today…