Savvy investors who picked the right time to buy ASX gold miners will be laughing all the way to the bank. But it's another group of market participants who are wearing the biggest grins.
Gold is one of the hottest trades on the market as it powers through the COVID-19 mayhem. The precious metal may have pulled back from its record high of US$2,064 an ounce but it's still holding firm over US$1,900 and is still up nearly 30% since the start of 2020.
ASX stocks sailing on rivers of gold
ASX gold producers like the Evolution Mining Ltd (ASX: EVN) share price and Saracen Mineral Holdings Limited (ASX: SAR) share price may have joined the bull run, but it's the smaller cap miners that have really outperformed.
For instance, the Chalice Gold Mines Limited (ASX: CHN) share price and De Grey Mining Limited (ASX: DEG) share price have surged around 400% each over the past six months.
Biggest gold winners are outside the ASX
But these may not be the biggest winners from the gold run. It's the gold Exchange Traded Fund (ETF) providers that could be making the biggest killing, according to Bloomberg.
These funds, which offer investors direct exposure to gold through a security that trades like a stock, have bought US$50 billion ($70.4 billion) worth of bullion this year. ETFs now hold more gold than every central bank with the exception of the US Federal Reserve.
These funds have struck the motherlode in terms of generating fees as fees are usually set as a percentage of their assets. The rush of retail investors into gold ETFs (it's a lot easier to buy and sell an EFT than the physical metal), gives these EFT providers a double windfall.
Unvirtuous cycle
It's almost incestual! Experts say the meteoric rise in ETFs is a big reason for the big jump in gold. And the big jump in gold is feeding demand for ETFs. ETF providers are having their cake and eating it twice.
"At these times, it's a very good business to be in," George Milling-Stanley, chief gold strategist at State Street Global Advisors told Bloomberg. "There's no question in my mind that ETF demand is driving gold right now."
State Street is the marketing agent for the largest gold ETF, SPDR Gold Trust (NYSEARCA: GLD).
Big fees up for grabs
Bloomberg calculated the top 10 gold ETFs have collects around US$610 million in total fees a year, based on current prices and holdings.
The big jump in gold is also infecting silver, which has also surged in recent months. Bloomberg estimated that investors have bought more silver through ETFs since the start of 2020 than was produced by the world's 10 largest miners combined last year.
Should you be worried?
Why investors should care is because ETFs can distort markets and even feed asset bubbles, in my view. The situation is made worst because not all ETFs actually buy the underlying asset but use financial instruments to mimic the exposure.
This introduces counter-party risks. As the GFC showed us, when market are in a meltdown, the backers of these financial instruments could collapse, leaving ETFs (and their investors) holding "assets" that aren't worth the paper they are printed on.
Gold is meant to be safe haven asset. ETFs may challenge this long held belief.
