ACCESSING GOLD  Many Australian institutional investors have had limited ability to gain exposure to gold in the past, which has traditionally been sought using futures contracts. The introduction of Gold exchange  traded commodities (ETCs) to the Australian market in 2003 created an investment structure that addresses many of the barriers to investment, enabling institutional investors to more readily gain exposure to commodities without trading futures or taking physical  delivery.  Similar to exchange traded funds (ETFs), ETCs are open-ended and highly liquid securities listed on the Australian Securities Exchange (ASX) new quotation platform – AQUA.

They are a cost effective structure with no entry or exit fees and low management  expense ratios.  There has been a huge surge in global demand for all physically-backed Gold ETCs since the third quarter of 2008. Global inflows into ETF Securities’  physically backed gold ETCs was A$2.8bn over the last 12 months to April 2009, of which A$2.3 billion was generated since 1 January 2009.  WILL THE GOLD RUSH  CONTINUE?  Global investors are undoubtedly struck with gold fever. The gold price has increased from $US250 in 2000 to more than $US1000 in March 2009, although it has since dropped back to $US950 in May 2009.  But will it last? 

Despite its recent successes, the gold market faces a number of challenges. Demand for high priced jewellery is down 11 per cent and industrial demand  for gold has fallen 9 per cent.  But while there has been some decline in the key demand drivers, the current economic climate points to a sustained upward pressure on the gold price. If history is anything to go by, a period of deflation like we are experiencing  today is often followed by a period of extreme inflation. The massive monetary stimulus that is currently being injected across world financial systems should eventually find its way into real economies and ultimately into prices.

Gold has traditionally been seen as the perfect insurance hedge against rising inflation. Therefore as inflationary  pressures grow, gold is expected to remain a strong performer.  Supply side factors also augur well for higher gold prices. Gold supply is stagnating with only two-thirds of the annual gold demand met with new mine supply. Production is also becoming  riskier and more expensive with lower grade ore being produced from higher energy, labour and exploration costs. Production levels from one of the world’s largest gold suppliers, South Africa, is at 86-year lows.  Whatever way you look at it, it seems King Midas has not lost his golden touch.