The Hindu Business Line : US gold exchange traded fund debuts on NYSE

AFTER more than a year's delay awaiting approval of Securities Exchange Commission, the US version of the gold exchange traded fund (ETF) - StreetTRACKS Gold Shares - listed on the New York Stock Exchange (NYSE) on November 18.

The fund has done rather well within the first few days of its launch with the total gold held in trust after first five trading days rising close to the widely expected 100 tonnes.

Unlike in other exchanges such as the UK product on the London Stock Exchange as also ETF of Australia and South Africa, trading volumes on NYSE have been impressive considering that trading was well above 3 million shares on any day, going up to 11 million shares on certain days.

UK's gold bullion securities traded 4.9 million shares on the first day, but average trading volumes over the year have been less than 2,50,000 shares.

The Australian ETF has a daily average trading volume since it began on March 28, 2003 of less than 20,000 shares. The South African ETF that began on November 3 this year has seen extremely modest volumes.

How significant is the arrival of the US ETF to the global bullion market and to the gold price? "There will need to be massive and, largely, consistent attraction of funds into the US ETF to have a meaningful impact on the gold market", Mr Kamal Naqvi, precious metals analyst with Barclays Capital pointed out, adding that at the very least, it seems likely that it needs to result in similar buying force that was seen from the two largest forces, so far, during this gold rally since 2001 - namely gold producers (through major reductions in their hedge-books) and speculators on gold futures (largely on Comex, but also on TOCOM).

Over this period, the average quarterly reduction in the global producer hedge-book has been nearly 94 tonnes. Speculative futures positions have been more volatile, with a true quarterly average of less than 20 tonnes; but have increased by more than 40 tonnes during a single quarter on nine out of the thirteen quarters since Q3 of 2001.

For the US ETF to have a genuinely meaningful impact upon the physical gold market, quite apart from the positive impact it has made so far on market sentiment, it is gold in trust that probably needs to rise by at least 50 tonnes on an average every quarter, it is believed.

According to Mr Naqvi, it is not impossible, given that US mutual funds hold over $1 trillion in assets and it would take only a tiny fraction of this money to be allocated to gold to result in a more than sufficient flow so that a rise to more than 500 tonnes or even 1,000 tonnes is eminently achievable, and in the current environment, possible.

But a great amount of caution is called for in going by such analysis as the `mirage of large numbers' has resulted in many failed forecasts, the expert warned.

There may be an unexpected source of buying interest for the US ETF - gold equity shareholders. Although gold prices are at 16-year highs, global gold equity indices have barely gained.

Gold equity shareholders may, therefore, turn to the US ETF, remarked Mr Naqvi.

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