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The $1bn gold rush

by Emma Dunkley on Aug 09, 2012 at 08:01

The $1bn gold rush

Investors have piled into physical gold exchange traded products (ETPs) since the start of the year, as signs of slowing growth and low interest rates have fuelled uptake of the precious metal.

ETF Securities has revealed net inflows into its physical gold ETPs have hit the $1.2bn (£0.7bn) mark since the start of 2010, with the bulk of interest coming from the European market.

Aside from the lack of global growth, ongoing European debt woes and low interest rates in the UK, some are expecting the US Fed and European Central Bank to enact further liquidity measures and quantitative easing in the coming months, although both fell short of triggering such action at their recent meetings.

More cash-printing by the Fed would devalue the dollar and raise inflation, both of which would spur investors to seek gold.

Ruffer’s Steve Russell and Hamish Baillie have positioned their Ruffer Investment Company ahead of an imminent ‘cavalry charge’ from the central banks, by raising their gold exposure in the view central bank action could undermine confidence in major currencies.

At the same time, the low interest rates and negative real returns in the bond market have meant the opportunity cost in holding gold - which does not pay an income and entails storage costs – has decreased.

But with all the uncertainty and lack of policy action thus far, the liquidity provided by ETPs and ability to trade intra-day has provided these products with a boost in terms of inflows.

Kris Walesby, head of capital markets at ETF Securities, said: ‘Investors need to be confident that they can execute effectively during periods of heightened market stress, as well as under normal conditions.

‘Liquidity is a fundamental driver in delivering best-execution, and this helps to reduce the overall cost to the investor.’

He added: ‘Investors are understandably concerned about how to position themselves in light of continued market uncertainty.

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