Investors expecting years of inflation and global economic instability are pouring money into securities backed by gold bullion, helping turn a simple safe haven into a mainstream asset class.
SPDR Gold Trust, popularly known as GLD, said the gold bullion it owned rose by more than 100 tons to 970.57 tons as of Thursday, which marked the biggest weekly gain in the history of the gold-backed exchange-traded fund.
However, fund managers say that setbacks in the price of gold are possible following a sharp rally when investors small and large are piling into the yellow metal.
GLD is now the second biggest U.S. ETF, with market value of $27.5 billion, which ranks it behind only the popular SPDR S&P 500. GLD currently owns more gold bullion than the government of Japan, according to the World Gold Council.
Holdings of COMEX Gold Trust, another U.S. gold ETF, also climbed to a record high 70 tonnes on Friday.
Diversification into gold out of traditional asset classes, such as stocks, bonds and currencies, by many sizable non-gold investment funds has fueled GLD's rally. Some pension funds and advisors to wealthy investors are now recommending 5 to 7 percent allocation toward gold and gold stocks.
"More and more generalist money managers are looking at gold. A lot of money mangers find comfort with the idea of owning gold via GLD. It's quite convenient to own the GLD, versus having to pay warehouse costs on your own," said Brian Hicks, co-manager of the $500 million Global Resources Fund at Texas-based U.S. Global Investors.
Gold ETFs are listed on stock exchanges and offer investors exposure in bullion without taking physical delivery. Sponsors of the funds buy a matching amount of physical gold and keep it in bank vaults.
Hicks' fund currently owns more than 4 percent of GLD, which is the largest single position of his fund.
U.S. gold futures for April delivery climbed Thursday above $950 an ounce, the loftiest level since July.
They traded at $940 Friday, but have still risen almost 20 percent from their low in January.
The furious rally in bullion stems from the inflationary expectation arising from the U.S. government's need to borrow more than $2 trillion to finance a bank rescue plan and to enact an aggressive package to stimulate the world's biggest economy and help reverse a global slowdown.
"The government does not know what it is doing, but it's doing a lot to it. It's just a matter of time for the Federal Reserve to come in to inflate the system," said Axel Merk, portfolio manager of California-based Merk Mutual Funds, which have more than $310 million of assets.
"It (gold) is moving more toward the mainstream. There are retail investors, but it is also becoming part of the asset allocation of larger fund managers having a portion in gold.
That also shows me that we are far away from the top of the gold market," Merk said.
There was recent market talk about a shortage of physical gold bullion as more investors turned to gold as a safe haven.
However, George Milling-Stanley, manager of investment and market intelligence of WGC, which helped launch GLD in 2004, said there was "not any problem whatsoever" for GLD's authorized dealers to acquire gold bars to create new shares.
Dennis Gartman, independent investor and author of the daily Gartman Letter, said that the low yield of currencies and U.S. Treasury bonds because of stimulus plans by central banks made gold -- which produces no interest -- more attractive.
However, Gartman also said the price of gold could easily retrace back to the $920 level because of over-extended buying in too short a period of time.
"It's a little worrisome that so many people are piling in," Gartman said.
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