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Exchange Traded Funds: Are They Worth Their Weight In
Gold?
Endeavour Silver Corp., Newmont Mining Corp. and Canarc Resource Corp.
Shed Light On the Impact of ETFs
By: Jen Lee
May 2006
With silver starting to trade as an Exchange Traded Fund (ETF) on the
American Stock Exchange on April 27th, the question of how this will impact
investment in the commodity remains. Do these securities, which trade with
no premium on the exchange, hold much weight when it comes down to the
decisive moment with investors? Endeavour Silver Corp. (TSX: EDR; OTC.PK:
EDRGF), Newmont Mining Corp. (NYSE: NEM), Canarc Resource Corp. (TSX:
CCM; OTCBB: CRCUF) and Jon Nadler Investment Products Analyst for
Kitco Bullion Dealers, offer their take on how the ETFs help to position
the commodities in today’s market.
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Since the gold bullion ETF began trading in 2004, analysts such as Michael
Porter for Lipper USA voiced their expectations. "I expect this to be a
blockbuster, because a lot of institutional investors who might not have
been mandated to own gold other than mining stocks will finally be able to
get directly involved in the gold market," Lipper told reporters. But how
have companies continued to view the ETFs as they relate to investment in
the commodity? Has the gold ETF been of benefit overall and for that matter,
will the new silver ETF garner much attention?
Hugh Clarke, Director of Investor Relations at Endeavour Silver Corp. (TSX:
EDR; OTC.PK: EDRGF) says of the announcement of the silver ETF that: “In
essence it will supply long term buying support to the silver market.” Short
term, Clarke says, “The news has already been discounted.”
Answering the questions of whether silver could be expected to come into its
own, Clarke says, “as we’ve talked about for years, silver does follow the
gold price. But once silver starts to be affected by its own dynamic and
fundamentals, where the supply and demand or an ETF comes in, it starts to
take on a life of its own.” Eventually he says, “you don’t get a complete
divorce between the two metals, but you will see silver react much more
violently, up and down, to the days events and that is going to continue and
accelerate into the future.”
Giving a bit of history on silver’s movement, Clarke says that by “the end
of December 2005, silver really started to take on a life of its own. It
started to outperform the price action in gold.” The ratio changed around
this time, says Clarke, from 60 /1 to 45 or 50/1, “indicting a much stronger
silver market than there has been in the gold market.”
With respect to copper, he says as the old saying ‘copper holds a PhD in
metals’ goes, “if you ever want to get a clear idea of the overall market in
metals you should look to copper.” In the grand scheme of things, “silver is
not a precious metal, it’s a little bit of both-it’s a precious metal and an
industrial metal and if those kinds of supply demand fundamentals have
driven copper to the extent it has been driven to now, it tells us that the
likelihood of that happening to silver is very high.”
The Golden ETF
On the other side of the spectrum commenting on gold, Seth Foreman, Senior
Analyst for Investor Relations at Newmont Mining Corp. (NYSE: NEM)
says that they, “continue to believe that gold is in a long-term bull
market. As our President, Pierre Lassonde recently indicated, he believes
gold will eventually have three zeros in its price- he just doesn’t know if
that first number will be a one, two or five.” For the shorter term, Foreman
furthers that, “we anticipate that gold will extend the general trend
exhibited by the metal over the past several months and will continue to
rise. Newmont isn’t alone in being bullish of gold, either. S&P Equity
Research Services recently raised their estimate for the year-end gold price
to $710 per ounce and well-respected industry consultant GFMS indicated that
the 1980 high of $850 per ounce could be challenged.”
When it comes to ETFs, Foreman says, “Exchange traded funds have grown to
play a very large role in the gold industry and as more ETFs are launched in
various commodities, their roles will continue to grow. The various gold
ETFs around the world have grown to hold more than 16 million ounces of
gold, approximately $10 billion in value. The ETFs allow investors access to
the gold price, but not the leverage provided by the gold equities. Since
2001, the gold price has increased more than 100%, but Newmont’s equity
price has increased more than 220%, not including dividends.”
Gregg Wilson, Manager of Investor Relations at Canarc Resource Corp. (TSX:
CCM; OTCBB: CRCUF) believes that, “the success of the gold ETF very
clearly demonstrates gold's strong investment value. In fact, the gold ETF
has exceeded forecasts of it's popularity. The oil price has been a driver
in the strong gold market but is certainly not the only one.”
Looking ahead at this summer’s projections for delivery, Wilson commented
that, “the recent record volumes for the gold EFT especially when gold broke
out to the $640 price level triggered some liquidation, however, the longer
term trend for the commodity is still in place and the impact of any
correction on the ETF will be in my estimation short lived and quickly
forgotten as we move forward this year.”
When asked whether silver’s status as an ETF will help bring the commodity
into stronger standing on its own, or whether its relation to gold will
always win out, Jon Nadler, regular contributor to MarketWatch and
Investment Products Analyst for Kitco Bullion Dealers responded,
“There may well only be a symbolic tie anymore, inasmuch as they are part of
the metals complex. The reality is that silver's monetary and inflation
hedge role has vastly diminished. Its fate is now inexorably tied to
industrial consumption, to copper mining and supply/demand. Further to this
he added, “We do not see the ETF suddenly imparting price stability upon
silver. We do see a bit broader participation from formerly reluctant buyers
(say, pension funds and similar), but that is about the extent of it.”
As silver, gold and copper are all interrelated, investors could look to
these indicators for an outlook ahead. As Jon Nadler reminds, “For the
average individual investor, we remain strong advocates of the physical
ownership of gold and silver, not as represented by either derivatives
(futures and options) or by (the recent) ETF products, but as embodied by
storage accounts for bars, coins and by certificates and pool accounts.” In
this light, tracking the real movement of commodities could be helpful in
projecting how the market will turn, before the ETFs react.”
Jennifer Lee
Jennifer Lee has a degree in English Literature from the University of
British Columbia. She holds a publishing certificate from Simon Fraser
University and has worked at both Vancouver and Western Living magazines,
where she began her career as an editorial intern. She has worked as an
editor in countries such as Zimbabwe and South Africa, producing books,
newsletters and editing various quarterly magazines on a variety of
international development related topics. In South Africa, she worked to
help produce a bi-weekly newsletter for the Institute for Security Studies
on crime and corruption headlines which appeared in all national and
provincial papers. Prior to working in southern Africa, she wrote articles
for DMR Consulting Group, on mergers and acquisitions taking place in the
market during 2001. She now produces a quarterly publication at the
University of British Columbia.
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