Precious Metal ETFs Capture Investors' Fancy

By Michael S. Fischer, Senior Financial Correspondent
Friday, December 14, 2007 5:23:50 PM ET

LONDON (HedgeWorld.com)—ETF Securities this week reported growth in assets under management in its five physical precious metal exchange-traded commodities, to $800 million from just $65 million six months earlier. This growth in the ETCs was beyond the forecasts of precious metal analysts, according to the firm.

ETF Securities' total assets have grown by $2 billion in 2007, with physical precious metals kicking in more than 40% of the new money, according to a statement. In a statement, it said that because of significant investor demand for easy access to commodities and more recently precious metals, the firm has listed all five of its physical precious metal ETCs on the London, Amsterdam, Frankfurt, Paris and Milan bourses.

Most recently, according to the statement, ETFS Physical Platinum and ETFS Physical Silver have attracted the greatest interest from investors. It said Physical Platinum is now the largest platinum ETC in the world, with more than $150 million in assets, the result of a growth spurt of 650% in the past six months and quadrupling in the past six weeks.

Moreover, Physical Silver is the fastest-growing silver ETC in world, it said, after having grown by 1,400% in the last half year, and quadrupling in the last six weeks. This product can also boast of being the largest silver ETC in Europe, exceeding 10 million ounces.

It said that the firm's ETFS Physical Gold has grown 4.5 times faster than any other similar gold product in Europe in the past six months. Significant interest is coming from investors in Germany, Austria and Britain. The gold ETC now exceeds $470 million, an increase of more than 575,000 ounces over the six-month period.

Good Fundamentals

"There has been significant increase in demand for ETCs linked to the price of commodities and particularly precious metals," said Nik Bienkowski, head of listing and research at ETF Securities. In an interview, Mr. Bienkowski said that exchange-traded funds provide investors with a mechanism to buy gold and other precious metals safely and easily. In addition, precious metals are attractive to investors because they have a low correlation with other asset classes, and they are relatively liquid compared with other alternative assets.

Real estate, for example, is looking "toppy," he said, and it's not as liquid. Some real estate funds have cut their NAVs 20% over the last month, he noted, and some are freezing redemptions for the next 12 months. As for hedge funds, some are doing well, while others have gone under; a few have closed down redemptions.

Mr. Bienkowski said that fundamentals for precious metals look good for at least the next year, but cautioned that even so, prices could fall because of overbuying, which would cause price momentum to abate. After overshooting to the upside, the price could overshoot to the downside, he said.

He said that ETFs, which are basically securitized futures, are the simplest vehicle for most investors, including larger ones, seeking exposure to precious metals and other commodities, because these people don't want to manage rolling futures, margin calls and the like. He acknowledged that very sophisticated investors might be better off trading futures because they can do so at a slightly reduced cost compared with ETFs.

According to ETF Securities, all of the firm's physical precious metal ETCs are backed by allocated metal, uniquely identifiable bars that carry no bank credit risk. The bars and ingots are held in trust in London by the custodian HSBC Bank USA N.A., which is the world's leading custodian for ETCs with approximately $20 billion of precious metals being held for such products.

The metal held with the custodian has to conform to the rules for good delivery of the London Bullion Market Association and London Platinum Palladium Market. Securities are issued only after metal is confirmed as having been deposited into the ETF Securities' bullion account with the custodian.

ETF Securities started out by creating gold bullion securities in Australia in 2002. The next year it listed the world's first gold exchange-traded fund on the Australian Stock Exchange. In September 2006, the firm listed an entire platform of ETCs, consisting of 19 individual commodities and 10 different baskets of those commodities. Today, the firm offers 50 or so ETFs that track baskets or individual commodities.