Gold ETFs: "Miners Have Created a Frankensteinian Monster"

It's been a long, 12-year run of noteworthy gains for gold ETFs. It's created an imbalanced investment vehicle, says Kitco economist Jon Nadler in an interview with Bloomberg.

Experts predict that the demand for gold ETFs will remain stagnant because of “dollar-quoted gold imports making it costly at the currency exchange rate of over Rs 56 a dollar.” Just eleven days ago on June 14, gold surpassed an all-time high of Rs 30,550 per 10 gms. According to The Association of Mutual Funds in India (AMFI), the AUMs of gold ETFs were almost twice as high on May 31, 2012 when compared to that same time just a year ago: from 5, 463 to 10,312.

Because of the stark price increase, no one is exceptionally excited about jumping into an investing relationship with them right now. Investment is down at least 50 percent. Investors have started making profit booking.

From Business Standard:

"Gold ETF is a price elastic product. So when prices go up sharply, investors do profit booking. The total AUMs of gold ETFs increased during May mainly because of the escalation in the gold prices. Our AUMs have remained steady in the range of Rs 30-40 crore," informed Nitin Rakesh, chief executive officer, Motilal Oswal Asset Management Company.

…

Analysts see limited returns from gold ETFs in the current market conditions. "In the current market scenario, it is advisable to invest 40 per cent of investment portfolio in equities, 40 per cent in other commodities and 20 per cent in gold or silver and related products. Equities may perform better than ETFs over the next few months," said Chokkalingam G, executive director and chief investment officer, Centrum Wealth Management Ltd.

This data comes as especially bad news for jewelers. Consumer demand has plummeted to a 25-year low amidst the high gold prices.

"I think the gold miners have created a Frankensteinian monster," says Nadler. "I get a lot of email from jewellers, not only from India, pleading when will be able to make a living again [sic]."

- Jon Nadler, Kitco economist

Nadler cautions investors to avoid getting too caught up in these performance details. Instead, he suggest that you “treat gold like a central bank and save it for a rainy day.”