Gold is widely viewed as insurance against accelerating price rises
Gold is widely viewed as insurance against accelerating price rises © Michael Dalder/Reuters

An exchange traded fund has become one of the world’s biggest owners of gold, surpassing even the central banks of Japan and India, as investors have scrambled to buy the precious metal and pushed it to record highs.

SPDR Gold Shares, an ETF that owns physical bullion rather than just financial derivatives, has hoovered up gold this year as investors seeking price gains or a haven asset channel more money into the fund.

The size of the fund’s holdings — which are held in HSBC’s London vaults — has climbed to 1,258 tonnes. On Monday and Tuesday alone it added another 15 tonnes, roughly five times as much as Michael Caine’s bank robbers lifted in The Italian Job, based on the $4m value of the gold taken in the 1969 film.

The ETF is a partnership between State Street, a big Boston bank, and the World Gold Council, a trade body for the industry. It has posted a 33 per cent return this year that has helped lift its value to more than $80bn. The gold rally continued late on Tuesday as the metal’s price passed $2,000 a troy ounce for the first time ever.

The size of the fund — known by its ticker GLD — puts it among the ranks of major central banks. Its holdings are equal to a quarter of all the gold held at Fort Knox in the US, more than the gold reserves of the Bank of Japan, the Bank of England or the Reserve Bank of India, and not far from China’s 1,948 tonnes of the precious metal, according to data from the WGC.

Chart showing physical gold held by central banks and SPDR Gold Shares

Enthusiasm for the metal is being driven by some investors who fret that extraordinary moves by central banks to dampen the economic impact of coronavirus could ultimately ignite long-dormant inflationary pressures. Gold is widely viewed as insurance against accelerating price rises.

Wells Fargo analysts have called the precious metal a “chameleon” as the causes of its rally have evolved.

“From 2016 to 2019, gold tracked closely with falling global long-term interest rates. Then in early 2020, gold’s rally attached itself to coronavirus fears and excessive global money printing,” they said in a note on Monday. “More recently, gold has hopped on the US dollar train; rallying above $1,900 as the US dollar has become one of the weakest currencies on the planet.”

GLD was one of the first commodity-based ETFs when it launched in 2004. Its ownership of physical gold bars stored somewhere in London sets it apart from many of its newer peers, which mostly use commodity futures. Its shares are priced at roughly one-tenth the cost of one ounce of gold.

Chart showing revenue estimates of ETFs

The rising popularity of GLD has also turned it into the biggest money-spinner of the ETF industry, surpassing even the revenues thrown off by State Street’s pioneering SPDR, also known as “Spider”, which tracks the US stock market. 

The stock market ETF, which is comfortably the world’s biggest with $289bn of assets, charges end investors a fee of just 0.095 per cent a year, which means its gross revenue to State Street is currently roughly $275m annually. GLD, on the other hand, costs investors 0.40 per cent a year, which means it is currently throwing off about $320m of revenue a year.

ETFs were first invented in the early 1990s as a way for investors to be able to trade index funds throughout the day, but in subsequent years Wall Street has put a wide array of assets into the ETF structure, from stocks and bonds to more complex securities, such as risky loans and volatility-linked derivatives.

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