It's no secret that Brazil, Russia, China and India (BRIC Countries) are all buying gold - some covertly and others just as a matter of fact. Chinese buying gets most of the attention, although India's purchase, last year, of 200 metric tonnes of gold from the IMF also made international headlines and caused investors worldwide to ponder the reason.
So, why would Abhijit Chakraborty, Sr. VP, Institutional Equities, Fortune Financial Services India Ltd., say in a chat with ET Now, The current strength that we see in the metal prices internationally has less to do with the fundamental demand and more to do with the buying that has happened from the ETFs.
He goes on to say that demand for physical gold through ETFs somehow gives an inaccurate measure of physical gold demand. He refers to it as hoarding and says when that comes to an end gold prices will fall. In other words, he maintains the creation of Gold ETFs made gold prices rise, as though without them, gold demand would be a fraction of what it is now.
I've used this line a couple times now and once again it seems appropriate. To say the creation of gold ETFs makes the gold price rise is to say that before thermometers, there was no heat. Thermometers, don't make heat just as gold ETFs do not create new gold demand. Rather, it was the other way around.
Because gold demand was rising, Wall Streeters figured out a way to turn gold into a piece of paper. Note that not all gold ETFs hold physical gold. Some hold contracts while others hold mining stocks or a combination thereof. If you own shares of stock, you actually do not own any gold. You own shares in the mine's profit in producing it. That's it!
Physical gold ETFs were created as a result of rising demand that existed before the ETF was created. Obviously, some prefer to own physical gold through an ETF as it settles the issues of storage, shipping etc. To that I say, you can store a couple hundred thousand dollars worth of gold in a soup can. Storage isn't really a problem. As far as shipping, $1000 worth of gold can be mailed for the price of a postage stamp. (yes, more if you want to insure it but nonetheless.)
And, do you really think an ETF is managed for FREE? Obviously there are costs associated with buying any ETF. Why would someone create the option to do this for nothing?
So, frankly, I believe the contrary. I would contend the creation of gold ETFs have served to stifle physical gold demand. Without the myriad of options now created to invest in gold, physical demand would be even higher than it is now.
I believe many of those investors who have purchased shares in a Gold or Precious Metal's ETF, don't understand what they actually own. Case in point: A friend of mine came to me and said thanks for all the articles on gold and silver. It was because of the understanding he attained by reading that prompted him to buy a precious metals ETF from his financial adviser.
I immediately asked if the ETF held the physical metal and he did not know. He just thought he was investing in precious metals. Do you invest in precious metal's ETFs? Do you know if you own the physical metal through the ETF or do you own paper metals?
Gold demand is gold demand, however it is acquired. India did not need a gold ETF to buy 200 tonnes of gold. Neither does China or any other Central Bank.
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