POLITICAL ECONOMY
exist in 1979 (at least as gold mining Investment Demand Trends
companies). A similar change also is Investor buying habits meanwhile are shifting as a consequence of
already occurring in silver mining. economic developments in the developing world. In the past, large
volumes of gold and silver jewellery were bought as forms of savings
Not All Developments Sanguine and investments. They still are, but the volumes are falling and will
Of course, these trends may be continue to decline as investors from the Middle East, India, China
reversed. The rise of resource national- and east Asia shift from buying precious metals jewellery to (a) buy-
ism being seen in Venezuela, Bolivia, ing bullion bars, coins, and medallions, and (b) investing in other
Ecuador (and to a lesser extent in Peru) financial assets.
carries the risk of reducing metals pro- Even as this shift is occurring, investment demand overall for pre-
duction in those countries in the long- cious metals is rising. In a perhaps ironic twist, even as investors in
run. These conditions could also spread developing countries move away from viewing precious metals as
to other countries. An interesting and their prime form of savings and investments, institutional and high
net worth investors in the developed economies are increasing their
interest in precious metals as investments.
Overall, the volumes of metals being purchased by investors are
increasing. However, the nature of the buyers is shifting toward those
in industrialised economies and the form of these purchases is shift-
ing from jewellery/statuary to bullion and bullion-based accounts.
Financial markets continually evolve. One of the recent develop-
ments has been the emergence of the Exchange Traded Fund. ETFs
began as baskets of equities which were bundled together and trad-
ed as a single share on a stock exchange. They were hugely popular.
Since 2003, the concept of an ETF migrated to gold. They have had
a major impact on precious metal markets. Gold was seen as a finan-
cial asset to which the ETF concept could be extended logically. Gold
was also seen as having the most liquid forward market of any com-
modity by an enormous margin, thus making it the most suitable
commodity for which an ETF might be attractive to investors.
A series of ETFs have been created and launched and by early 2007
nearly 22 million ounces of gold were held in ETF accounts. ETFs con-
tributed to the bull market rush into physical gold by investors, 2003
– 2007. In 2006, roughly 18% of world investment demand for phys-
ical gold came through ETFs. While they are not dominating the
physical gold market for investment products, they clearly are
important lesson is that it happened in adding to the market size and investors’ influence on prices.
Ghana for gold in the 1960s, and was In April 2006 a silver ETF was created. By May 2007 more than
more than entirely reversed in that 170 million ounces were held in this Silver Trust ETF and the Central
country during the past two decades as Fund of Canada, an ETF-like silver investment fund that has been
new, more enlightened policies were around for years. The ETF has absorbed a tremendous amount of
implemented which counteracted the silver into its allocated accounts, reducing liquidity in the physical
economic damage and impoverish- silver market and contributing to the 56% increase in annual aver-
ment spawned by the thoughtless age silver prices in 2006.
application of nationalist rhetoric. ETFs overall will increase the volume of investment in precious met-
Wags will point out that the propensi- als because investors who otherwise would not invest are, and will be
ty to expropriate or tax mining at pro- buying shares of ETFs. From what we can tell, they represent an
hibitive rates is proportionate to the upward shift in the investment demand curve.
price of commodities. When gold, cop- Gold ETFs have been initial successes in that they attracted greater
per, silver, oil, gas, and everything else investment interest in gold than even the most bullish observers had
were at pathetically low prices at the anticipated. They were helped by having been launched in the midst
turn of the century, governments were of the biggest bull market for gold investment demand in history.
begging international mining and That is not to belittle their success.
energy companies to come explore However, the gold ETFs cannot yet be ruled to be long-term suc-
and exploit their natural resources. cesses, because they have not been tested in a bear market
•
With prices double, triple, sometimes
even 10x higher today, those same
Jeffrey Christian is Managing Director of CPM Group.
governments are all too eager to muck-
To receive a sample of CPM Group’s monthly Precious Metals Advisory
up the financial relationships they
email:
info@cpmgroup.com or visit:
have developed.
www.cpmgroup.com
52 SEPTEMBER 2007 COMMODITIES NOW
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