South African investors favour gold ETFs over gold stocks

South African gold mining stocks underperformed the world's largest gold ETF by 10% in 2011, boosting demand for gold exchange-traded funds

Seeking liquid access to gold

The search for a cost-effective and liquid means of accessing gold is driving South African investors to favour exchange-traded funds (ETFs) over gold stocks, industry participants say.

“Investors are attracted by the fact that gold performs strongly in more extreme scenarios with high inflation, a weak US dollar and elevated financial stress,” says Carl Isernhinke, chief investment officer at Sasfin Bank in Johannesburg. “Gold performs well even during deflation, where very high levels of financial stress triggered by sovereign defaults in Europe caused a flight to safe assets.”

Despite this, South African gold mining stocks underperformed the world's largest gold ETF by 10% in 2011, according to figures from the Johannesburg Stock Exchange (JSE). One reason why gold mines have underperformed is that investors are buying ETFs rather than investing in gold stocks, says Isernhinke.

The backbone of the ETF market has always been gold-based ETFs, which South Africa’s big retail banks, particularly Absa Capital, Standard Bank and Nedbank, have listed on the JSE. After Absa Capital launched the NewGold ETF, the first gold ETF to be listed on the exchange, it became the largest ETF in South Africa, attracting more than 10 billion rand ($1.3 billion) in assets under management.

"In South Africa, we are only allowed to sell physically backed ETFs, and that is why product development around gold is so popular," says Vladimir Nedeljkovic, head of Investments at Absa Capital in Johannesburg.

In fact, gold ETFs are proving more popular than their equity-linked counterparts, says Isernhinke. “Investment-driven demand for gold makes up to 40% of the total demand for investments.”

"The gold funds have become enormous," adds Stephan Barnes, head of structured products at Standard Bank in Johannesburg. "There has been a real growth around ETFs and ETNs in the South African market and the investors tend to be retail."