Gold is red hot at the moment but ETFs could violate threshold rules
But the complex fund structures, which offer a direct route into gold for those who are looking for “defensive assets”, have become so big they threaten to violate threshold rules, analysts warn.
ETFs are amassing never before seen stakes in dozens of small companies but the behaviour of the passive funds are giving some investors jitters.
According to a report in the Wall Street Journal there has been concern that the large amounts of funds rushing into the market are impacting rather than mirroring pricing.
They are passive investments and should largely merely mirror the movement of the Gold price
Lynn Hutchinson, assistant director at wealth manager Charles Stanley says ETC performances have increased over the past three months to around 7.4 per cent whereas the actual gold price has increased approximately six per cent.
She added: “The assets under management size of some of the European domiciled ETCs has now reached sizes of $2.8bn for iShares, $4.2bn for Source and $6bn for ETF Securities.
“Whilst in the US domiciled products the assets under management are far bigger with the SDPR GLD ETF now showing an AUM of $35bn.”
The World Gold Council published a full report for 2016 which shows annual inflows of gold into ETFs which reached 531.9t which is the second highest on record.
Global demand for gold-backed ETFs and similar products was the highest since 2009, according to Gold.org.
Ms Hutchinson added: “There has also been demand for the gold miners ETFs – VanEck in the US have both a Gold Miners ETF and a Junior Gold Miners ETF.
“Both have been extremely successful in gathering investor flows with the Gold Miners ETF assets reaching $11.8bn and the Junior Gold Miners ETF reaching $4.8bn in assets under management.
Precious metals are in vogue but ETFs are causing some concern
“VanEck also launched a Junior Gold Miners UCITS European domiciled ETF in 2015 which has much smaller assets of around $60m.
“In the US domiciled ETF, the fund currently has underlying holdings that are so big that the ETF is at risk of violating certain Canadian and US regulatory thresholds on ownership percentages of company shares.
“VanEck which manages both the ETF and the Index itself (MVIS Global Junior Gold Miners Index) has announced that changes will be made to broaden the scope of the index.
Gold is a safe haven asset but investors are becoming more complex in how they handle it
“The index tracks relatively small niche area company shares which are selected based on their market cap sizes which currently range between $75m to $1.6bn – this is expected to change to $75m to $2.9bn.
“The result of this will tilt the share selection more into the small to mid cap ranges from small cap currently.
“The changes are likely to mean that a further 24 shares may be included in the ETF (which are currently approximately 50 holdings) and which could potentially represent around 60 per cent of the ETF assets once changes are completed.”
A miner works at a gold mine in La Rinconada, the highest permanent settlement in the world in Peru
Meanwhile, Nathan Sweeney, senior investment manager, Architas said geo-political tensions are also responsible for the price fluctuations: “The value of gold tends not to move in line with other assets, such as shares or property.
“It is therefore viewed as diversifying asset within a portfolio.
“Historically, it has performed well in periods of market turmoil and when inflation is rising so it seen as a form of portfolio insurance.
“Given the various potential issues across the globe from the Election of Donald Trump in the US and heightened tensions with Russia and China, to the flexing of North Korean muscles and more closer to home question marks over the future of the European Union it is no coincidence that demand for Gold has been growing.
“Gold is often described as the ultimate safe haven asset because of its tendency hold its value when other asset classes fall.
“If you are considering investing in this asset class a key questions is how to access it.
“You can buy physical Gold but this obviously has storage and security costs.
“You can invest in gold mining shares but you are then much more exposed to the management of individual companies and stocks rather than just the value of the commodity.
“As a result the increasingly popular option is to use Exchange Traded Funds (ETFs) as a direct route into gold.
“These funds track a particular sector, or in this case commodity.
“They are passive investments and should largely merely mirror the movement of the Gold price.
“This offers a relatively low cost access to the value of Gold without either physically owning the precious metal or being exposed to the movement of individual commodity stocks.”