ETFs reduce gold volatility
new york — In times of trouble, gold has long been a popular haven for investors expecting that more volatility will increase the value of the commodity. But lately, it’s taking more than threats of war or terrorist attacks to get much of a reaction from the bullion market.
Price swings for the precious metal narrowed last month to the smallest in more than a decade, even with rising tensions between the US and North Korea, political discord in Europe and trade disputes fuelled by Donald Trump’s America-first policies. That’s a disappointment for investors who remember how gold tripled in value after the 2008 financial crisis or surged more than 50 per cent in the months after the Iranian hostage crisis in 1979.
One possible reason for the lack of volatility is the growth of exchange-traded funds (ETFs) backed by gold, which account for about two-thirds of the $113 billion invested in precious metals, compared with almost nothing before 2004, when bullion ETFs were created, according to Chris Louney at RBC Capital Markets.
ETF investors may help stabilise the market because they tend to hold assets longer than hedge funds and large speculators who are more likely to react faster to events, said Michael Blumenroth, an analyst at Deutsche Bank.
“You’ve got a lot more retail interest, and that constant state of demand has brought down the overall volatility,” said Peter Sorrentino, the Dallas-based chief investment officer of Comerica Asset Management Group, which oversees $43 billion, including gold ETFs. In essence, the commodity “has been securitised” by the inflow of retail cash, he said.
The birth of bullion-linked ETFs has led to a surge in trading. In March, the daily average value of gold transactions cleared through the London Bullion Market Association was $22.2 billion, compared with $6.4 billion during the same month in 2004. SPDR Gold Shares, the biggest such ETF, began trading in November 2004. Since then, it’s amassed $33.7 billion in assets, making it a major holder of traded gold, according to data compiled by Bloomberg.
Even with all that money invested in the precious metal, on April 28, the 60-day historical volatility for spot gold fell to the lowest since 2005. — Bloomberg