January 2009
By Jan Harvey
LONDON (Reuters) – Investors are seeking out the security of physical gold as economic uncertainty and falling interest rates knock the appeal of other assets, with premiums for gold coins and bars soaring and ETF holdings on the rise.
Metals consultancy GFMS said on Thursday that overall demand for bullion held firm in 2008 from a year before, as a sell-off by institutional investors raising funds to cover losses on other markets was balanced by fresh interest in physical gold.
Appetite for smaller investment products, such as coins and bars, is burgeoning, according to dealers. “Gold is a safe haven,” said Mark O’Byrne, executive director of Gold & Silver Investments, pointing out the precious metal significantly outperformed most other assets in 2008.
“Last year, sterling gold was up more than 40 percent, and in dollar terms it was up 5 or 6 percent, while the stock markets were mostly down a minimum of 20 to 30 percent,” he said. “A lot of people are diversifying, they feel exposed.”
Premiums paid by investors for Krugerrands — one-ounce coins — over the spot price of gold are currently 10-11 percent or higher, dealers say, against a more typical rate of 4-5 percent.
Smaller sovereign coins, which weigh around 1/4 of an ounce, currently command a premium of around 20 percent, against a more usual level of 15 percent.
Premiums paid for investment coins have been boosted by a lack of selling back into the market, dealers say, as investors hold onto their existing gold.
ETFs
Interest in physical gold has also led to increased buying of exchange-traded funds, which issue securities backed by actual stocks of a given commodity. Buying of gold bullion by ETFs has formed a major plank of demand in recent years.
The largest such fund, New York’s SPDR Gold Trust, holds a record 790.66 tonnes, and recently overtook the Bank of Japan as the world’s seventh-largest holder of gold bullion.
London’s ETF Securities said holdings of its Physical Gold exchange-traded commodity PHAU.L have risen to some 1.9 million ounces from 1.4 million at the end of November.
“The key factor driving this is safe haven demand,” the company’s head of research Nicholas Brooks said.
“Most of the flows we are seeing are going into our physically backed products, which is a pretty clear indication that people are buying because they are concerned about counterparty risk, the financial system and the outlook for currencies.” In addition to the uncertainty surrounding other assets such as equities and currencies, gold is benefiting from a fall in interest rates as central banks move to stimulate growth.
The European Central Bank became the latest to cut its rates, by 50 basis points to 2.00 percent, on Thursday.
Last December the U.S. Federal Reserve slashed its interest rates to 0.00-0.25 percent from 1 percent previously.
A low interest rate environment cuts the opportunity cost of holding gold, which is a non-interest bearing asset.
(Editing by Sue Thomas)