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StreetTracks Gold Draws $1.3 Bln, Best Start for ETF (Correct)
StreetTracks Gold Draws $1.3 Bln, Best Start for ETF (Correct)
(Adds back dropped word in second paragraph.)
By Claudia Carpenter and Choy Leng Yeong
Dec. 31 (Bloomberg) -- A fund created last month to invest in gold bullion has attracted $1.29 billion from investors, making it the most successful start for an exchange-traded fund since the securities were created in 1993.
StreetTracks Gold Trust, the first fund traded on the New York Stock Exchange to invest in the commodity, enables investors to invest in gold without purchasing the metal or futures contracts. About $227 billion is invested in exchange-traded funds, the biggest of which are linked to stocks in the Standard & Poor's 500 Index and the Nasdaq-100 Index.
Demand for the new gold fund, started Nov. 18, has been spurred by fund managers barred from owning physical commodities who want to bet that this year's rally will continue. Gold prices reached a 16-year high of $458.70 an ounce in October. Some investors also buy gold as a hedge against a decline in the dollar.
``We use it as a parking place for money,'' said Gregory Orrell, president of Livermore, California-based Orrell Capital Management Inc., which has 7 percent of its $76 million in cash and gold-backed shares. ``Instead of holding cash, we can put it there.''
Since its creation, the fund has grown faster than any other exchange-traded fund, according to Santa Rosa, California-based TrimTabs Investment Research. The previous record was held by the iShares Lehman 1-3 Year Treasury Bond Fund, a short-term debt fund that raised $610 million in 30 days.
``There has been nothing like this in the history of ETFs,'' said Carl Wittnebert, director of research at TrimTabs.
World Gold Council
Christopher Thompson, chairman of South Africa's Gold Fields Ltd., came up with the idea for the fund in 2002. Thompson, who is also head of the World Gold Council, said the fund would help boost investor demand for the metal. The council is funded by the world's biggest gold producers including Denver-based Newmont Mining Corp.
``It's as good a time for the gold business as it has been in a long time, and the outlook is quite promising from the perspective of investment demand,'' Thompson said in an interview in September.
Higher Prices
Gold prices have climbed 73 percent from a 20-year low in 1999 as prospects for inflation boosted demand as a hedge against declines in fixed-income assets. Hedge funds and other large speculators have also boosted purchases of gold futures as protection against declines in the dollar.
Gold, which averaged $410 an ounce in 2004, is expected to rise to an average $430 an ounce in 2005, Australia & New Zealand Banking Group Ltd. forecast in a Dec. 20 report. Prices have climbed for four years in a row, gaining 5.4 percent in 2004. Gold prices gained even as gold equity shares fell, with the Philadelphia Gold & Silver Index of 12 mining company shares falling 9.17 percent in 2004. Shares of Newmont Mining, the world's biggest gold producer, dropped 8.37 percent in 2004.
``We would buy the ETF when gold has strongly underperformed gold stocks, and there's going to be a rebound in the price of gold,'' said Todd Scholl, a gold trader and analyst at San Antonio-based U.S. Global Investors Inc., which manages $1.4 billion, including $380 million in two precious-metals funds. ``We would use it as a tool for managing our portfolio.''
Cheaper to buy Bullion
The gold fund is an expensive way to buy gold, said Stuart Flerlage, managing principal of Brownstone Advisors LLC, a New York-based investment company that has $100 million in futures including gold. Investors pay a 0.4 percent fee for the fund's expenses, according to the prospectus. ``It's a lot cheaper just to buy the actual bullion, or the futures,'' he said.
James Turk, founder of Channel Islands-based Goldmoney.com, which stores about $24 million of gold for owners in 102 countries, says the fund is risky because the gold that backs the securities is held by a bank.
The fund's gold is mainly held by HSBC Bank USA and by so- called ``sub-custodians'' such as JPMorgan Chase & Co. and Bank of Nova Scotia, according to the fund's prospectus. The prospectus states that the World Gold Council ``does not undertake to monitor the performance of any sub-custodian'' and ``may have no right to visit the premises.''
``Gold is your bedrock asset; you don't want to take any risks with that,'' Turk said. ``You're taking a risk if you buy a fund that doesn't have all of its assets audited.''
Jewelers are the biggest users of gold, consuming 94 percent of the amount of gold mined each year. Investor demand uses up the rest, plus sales of gold by central banks, which are the largest owners of gold bullion.
Goldman Sachs Group recommends investors keep 3 percent of their assets in commodities, such as gold. Citigroup, by comparison, recommends investors put 60 percent of their money in stocks, 35 percent in bonds and 5 percent in cash.
More demand for gold-backed shares is expected next year, said Vaughn Francis, director of business development at Minneapolis-based TIS Group Inc., a money-management company with $50 million in assets.
``I would anticipate looking at it very seriously in May,'' Francis said. ``Seasonally, May to August is the low for gold usually.''
To contact the reporters on this story:
Claudia Carpenter in New York at ccarpenter2@bloomberg.net; Choy Leng Yeong in Seattle at clyeong@bloomberg.net.
To contact the editor responsible for this story:
Patrick McKiernan at pmckiernan@bloomberg.net.
Last Updated: December 31, 2004 00:38 EST
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