Gold 'QQQ': Key to a Precious Rally? in Precious Metals - Interesting News

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Gold 'QQQ': Key to a Precious Rally?

Security would benefit from bullion boom, analysts say
Sept. 24, 2002
By Thom Calandra, CBS.MarketWatch.com

NEW YORK (CBS.MW) -- Would an electronic substitute for physically owning gold boost demand for the metal in times of fiscal turmoil?

The World Gold Council, a bullion trade group, acknowledges it's working on a new investment vehicle for gold but offers few details. Experts at a New York bullion conference say they expect such a security, probably in the form of an exchange-traded fund that is listed on the New York Stock Exchange, in coming months.

"I think Chris Thompson's product will make a big difference," said Rick Rule, chief executive of Global Resource Investments. Thompson is the new chairman of the gold council, whose charter is to increase investment demand for gold. "If it's backed by the gold council and there is a big, recognizable gold depository involved, it will be a big success."

Thompson, the executive who helped turn South Africa's Gold Fields Ltd. into one of the world's largest gold producers, this summer brought on James E. Burton, former chief executive of the California Public Employees Retirement System, as its new CEO.

For now, individual investors worried about a financial meltdown have few alternatives to buying bullion bars, coins and jewelry. They can buy a closed-end fund, Central Fund of Canada that holds gold and silver in storage. There also are some small, preferred company stocks that act as loose proxies for gold and silver.

In addition, hedge funds and mutual funds can buy structured finance notes that represent gold, with a minimum commitment of $5 million. A number of banks, including HSBC, Deutsche Bank and others, also offer gold-denominated bonds sponsored by the World Gold Council.

"Anything that creates demand for gold is good," John C. Doody, editor of Gold Stock Analyst, said at the New York Institutional Gold Conference on Tuesday. The spot price of gold rose $4 an ounce Tuesday morning, surpassing the $325 level seen as a critical area of resistance.

Doody said he expects gold, which has benefited from the relentless decline of equities, and war fears, to reach $450 an ounce in the next two years, in part because of investment demand for the metal. Miners' output of the metal is seen falling about 3 percent this year, the largest drop since 1976 and a bullish sign for gold.

Gold enthusiasts long have floated the notion of an exchange-traded fund for gold, a bulky commodity that requires insurance and storage fees. Exchange-traded funds, such as the Nasdaq 100 Trust have swelled in popularity because of minimal fees and the flexibility to trade baskets of stocks real time on an exchange.

Exchange-traded funds now are available for fixed-income products, via Barclays Global Investors, the creator of iShare funds that track baskets of securities. The bond exchange-traded funds representing U.S. Treasury bonds, have risen sharply since their July debut as investors flock to the safety to government securities.

Treasury bonds and gold are among the best investment classes this year and for the past 12 months, along with certain other commodities, including soybeans, corn and wheat. Gold's price is up 18 percent this year, as is platinum, another precious metal.

In the gold industry, there is growing anticipation of the day when gold is available as a tradeable stock. No commodity is yet represented by an exchange-traded fund in the United States. The Securities Exchange Commission and possibly the Commodity Futures Trading Commission would have to approve such an exchange-traded fund, which almost certainly will require real-time arbitrage of prices and day-end storage of gold in audited vaults.

"Let's face it, safe-deposit boxes aren't cheap when you are talking about 400-ounce bars," said James Turk, chief executive of GoldMoney.com. Via the Internet, <Link to Article Source

Turk and others in the gold industry say they expect gold prices to rise sharply as investors begin to consider the metal as a substitute for currencies. Several gold miners are considering issuing their dividends in gold grams, among them Iamgold a small, profitable Canadian producer.

"At the end of the day, investors will find they need to own physical gold, which is extraordinarily difficult to do," said Eric Sprott of $1.2 billion (Canadian) Sprott Asset Management in Toronto. Sprott said his clients have a strong desire to own gold. He currently owns 19 percent of Central Fund, a closed-end fund that holds about $140 million worth of gold and silver and trades at a premium to bullion prices.

"The world's faith in managed currencies is a source of amazement," said James Grant, editor of Grant's Interest Rate Observer. "Gold will have its day as people confront the immense over-investment of faith they have in dollars, yen and so on."

Gold mining shares, as represented by the Amex Gold Bugs Index followed gold prices higher Tuesday morning.

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