Gold - How the Gold Market is Changing

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MARCUS GRUBB, Managing Director, Investment at the World Gold Council, talks to MineWeb's Geoff Candy about the growing acceptance of gold...

GEOFF CANDY: Marcus we've just seen gold hit a new all-time high and you've also just released your quarterly Demand Trends for the Gold Market for the Second Quarter, but before we get into the nuts and bolts of the demand sector what I did want to get a sense from you, is of the nature of demand, and in particular, the way it's changed over the last decade – because I do get the sense that it's definitely becoming in the eyes of a lot of investors much more of a legitimate investment vehicle. 

MARCUS GRUBB: Yes – that's an interesting question because you've seen obviously over that period the advent of physical Gold ETFs in a number of countries around the world – those tonnages now are sitting at record highs, historically. 

Even though notwithstanding in this quarter as readers of the gold demand trends will see – we saw a fall in the ETF numbers. The number was positive but it was a less strong growth compared to the quarter last year. But it's true that over that period you've seen a considerable amount of gold going into those products as well as increased demand in bar and coin investment as well and what you've seen is a change in the geographical distribution as well. 

Recently, certainly in the last three to four years you've seen considerable bar and coin investing in European markets which hitherto had been dormant for decades, and obviously a lot of that investment is partly being driven by the economic problems in Europe and the problems around the Euro and sovereign debt countries in the Euro. 

Then on the ETF side I think what you've seen is that first of all gold was relatively inaccessible for professional investors until the ETFs were brought to market in 2002 to 2004. But more recently you're seeing is more and more private wealth organizations and asset managers, global macro funds. 

So what you would definitely call professional investors – not just high net worth and private wealth investors, are seeing gold as a useful foundation asset and hedge against depreciation of currencies as gold is in a sense a currency itself. They are using gold in that mode in their portfolios. They also see gold in the hedge against other risks such as deflation, or high inflation as well as currency depreciation, so it is true to say that gradually gold is being rediscovered as an investment asset. 

It's worth noting that the central banks in a way are leading on this because they have been purchasing gold now for the last year and a half or so, after being net sellers for over two decades – and this is using gold as a reserve asset in order to manage currencies. So the central banks themselves in a way are giving investors an indication that a weighting to gold in these times of economic stress and depreciating currencies, certainly in western countries, that gold has a real role to play.

GEOFF CANDY: If one looks at the weighting of gold in international portfolios and across the board in terms of assets under management, it is still a pretty small proportion of that. How much bigger is that proportion likely to get do you think?

MARCUS GRUBB: Yes, if you look at the current percentages, roughly speaking, on the basis that global assets under management across private wealth and professional or institutional portfolios, is roughly 120 trillion – that's a number that many observers will regard as fair. There are a number of surveys that analyze this on a global basis from CAP Gemini, Goldman Sachs, and Merrill Lynch. 

If you take the investment stocks of gold in private hands currently, the best estimate of that physical tonnage which would include of course the 2, 100 odd tonnes in ETF products, and the much larger tonnage in bar and coin products around the world, it's still under 1% of global assets – even with the rise in the Gold Price that we've seen over the last 12 months. And within that, there are quite a lot of areas of professional investment – notably pension funds, endowments and also in Europe, insurance companies where gold hardly figures at all in their portfolios. 

 

So I totally agree that at the moment it's still the case but many investors do not fully understand the gold market. They haven't come round to seeing gold as an asset that's important in a portfolio context and they haven't made substantial allocations to gold. And clearly with the price where it is, that's a good thing – it suggests that there's more demand to come depending upon obviously what happens in the gold market and also what happens to the broader macro picture.

GEOFF CANDY: What is your view of where we're sitting at the moment with regard to the broader macro picture, particularly given the problems we've seen in the Euro region and in the US?

MARCUS GRUBB: You only have to look at equity markets today to get an idea of that. Once again my screen is a sea of red and I spent most of my career before the World Gold Council in the equities business in one way or another.

I think the markets are giving clear signals that the sovereign debt problems, the lack of economic growth that we're seeing in Europe and in North America, the over burdening of private households with debt as well as sovereign debt and the transfer of the banking debt problem to the sovereign balance sheet – all of that is leading to a drag on economic growth that could well even potentially push us back towards another recession, and some observers I know are suggesting in some countries who may be even in recession now – we just don't know. 

I would recall that the way economic statistics are calculated – even in 2008 it only became apparent the United States was in recession in December 2007 – six to nine months after it had actually happened. So I do really think that these problems are not going to be solved quickly. We are effectively in a workout situation to try and restore a more normal economic picture in Europe and in North America – it involves considerable austerity in terms of cutting spending and also trying to reduce debt and in that context, it's going to be very difficult to generate the growth required to certainly generate good returns in equity markets. 

As a result also of course interest rates are likely to remain low for a longer period of time too, which in a sense favors gold because gold doesn't have a yield and it's often seen as a negative. Well when real interest rates are negative and nominal rates are near zero, that loss of the yield is pretty relevant in the case of gold. So all of that would lead me to think that gold is going to remain attractive as an asset class, during a period of stress like the one that we're in.

GEOFF CANDY: One thing that is curious is the drop off in ETF demand, and clearly it's coming off a very high base from the second quarter of last year. How much of that investment are you seeing – or what is the geographic spread of that fall off in investment especially given the renewed problems we're seeing in the west?

MARCUS GRUBB: Yes – we don't have total transparency on that but we do have some transparency on a regional basis on the total ETF market and its quite interesting. First of all I'd like to deal with the headline figure – you're absolutely right, the headline figure of a fall of 82% which is why total tonnage demand is down in this quarter across everything, is actually a somewhat misleading comparison because its comparing the net new investment in ETFs this quarter, Q2 2011 which was 51 tonnes – it's comparing to a quarter a year ago where we had over 250 tonnes – I think it was 290 tonnes of net new investment into ETFs and a lot of that was in Europe as a result of the first sovereign debt crisis. 

So actually net new investment of 51 tonnes in the second quarter – if you look back over the whole life of the ETF market, it's actually quite a good number for a quarterly inflow of investment. It's just when you compare it with 290 tonnes, it doesn't look so good. The second point is as with the sovereign debt crisis in Q2 2010, it's likely that a lot of the demand in Q2 this year that contributed to the 51 tonnes is in Europe because, although the sovereign debt problem had abated in April-May-June, it was still present and as we know, was about to build into a second crisis in the third quarter of this year. 

So when you look at the ETF tonnage through this quarter, April-May-June, it actually goes down and then it comes back up again towards the end of the quarter. Then we know since then, it carried on to hit a new all-time high in terms of ETF tonnage in July and August around the second sovereign debt crisis in Europe and the downgrading of US sovereign debt. 

So in some ways it's a bit of a spurious result simply driven by the fact that the quarter ended before these huge new inflows back into ETFs would be registered in the information. And we're going to see those of course come in, in a pretty strong investment quarter in Q3 – that's pretty clear already from the statistics we have.

GEOFF CANDY: Is that once again do you think, going to be led by Europe given the strength and the growth in demand for ETFs in the likes of India and the VSIT countries as you call them – Vietnam, South Korea, Indonesia, and Thailand?

MARCUS GRUBB: I think the bulk of it is certainly going to be in the western markets, so in Western Europe and the United States. It might be a bit of a footrace between the SPDR GLD in the US because of the sovereign downgrade. We know that that definitely helped increase inflows into ETFs in North America. 

But equally of course, we have the bailouts of Greece in particular, in Europe only a month and a half ago, which was definitely leading to more investment in ETFs for the products that are cross-listed across European stock exchanges. 

Then the other factor, as you rightly say is in India, that market has stagnated for a long time – I think for years since ETFs were launched in India – they only had a few tonnes of gold in them – about five tonnes. Now there are about 20 products – more than 20 ETF products available in India and they went through 20 tonnes quite recently which, whilst it's a small number still compared to the European and US based ETFs, you are starting to now see a significant contribution from the Indian ETFs and they are growing at a fast rate. 

So basically the bulk will be in the United States and in Europe again in Q3. The other thing is you'll probably see bar and coin demand very strong as well. We've had anecdotal evidence of that already from some of the European bullion banks that they've been selling coins and bars at very high rates during the European debt crisis.

GEOFF CANDY: Just to close off with and moving to the east where a lot of the demand is coming from as well – you talk about the change within those countries – the likes of South Korea, Indonesia, India, Thailand and Vietnam – the role of investment and the increase in investment and you're seeing as well in China and in India, a growth in urbanization and investment into gold. How is that change – that move into investment – likely to change over time, and in particular perhaps as tradition erodes somewhat or the traditional role of jewelry demand in India and the rest of the region. Is that likely to change the way that gold is perceived and perhaps used as an investment tool?

MARCUS GRUBB: That's a very interesting question especially in the context of this quarter where you've seen very strong bar and coin demand in markets that are traditionally more orientated towards jewelry. Obviously I'm speaking of China and India.

Part of that demand is definitely being driven by concern about inflation in those countries – so a very different paradigm to what is driving investment in gold through investment products in Europe and in North America. But at the same time it's worth remembering that jewelry is a much larger sector in both countries – India and China – and a lot of the jewelry buying is driven also by investment motives in that they buy the product by the gram and they pay a mark-up for the ornamentation charges. 

In the main, they're not buying brands – the consumers in those countries – they're buying high carat pieces by weight which is an investment decision and then wearing them as jewelry or gifting them for weddings, family occasions, etcetera. So although we do see in this quarter, an increase in bar and coin demand which is being driven by inflation, I don't think it's really a substitution from jewelry. And indeed if you look at jewelry it was up 17% in India and China in this quarter and both countries were up substantially in terms of total demand – India up 38% and China up 25%. 

An aside of that is I think it's premature to say that China is going to eclipse India soon as the largest gold market in the world. This quarter is a very good example as to why one should be cautious about predicting that. India off a higher tonnage number grew faster in this quarter than did China and so we don't see India giving up its number one position soon.

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