The international gold exchange-traded fund (ETF) market is suffering, owing to the poor performance of the gold price in 2013, the South Africa-based investment banking division of Barclays Africa exchange traded products head Vladimir Nedeljkovic tells Mining Weekly.

He says, while gold ETFs in South Africa have remained static, as investors are keeping their assets, a significant number of international gold ETF investors have been selling their assets in the global market.

Nedeljkovic explains that this is because institutional investors from South Africa are more familiar with precious metals stocks and are more patient with their investments, while international gold ETF investments are approached more speculatively, with investors selling their procurements quickly.

He adds that many South African institutional investors are also given mandates by their companies to hold onto their gold investments in the long term. Therefore, they tend to favour a buy-and-hold strategy when investing in gold ETFs.

Meanwhile, South Africa’s gold price has not fluctuated much in recent months, which means that Barclays Africa’s NewGold ETF product has not progressed, resulting in fewer investments being made.

“Currently, Barclays Africa has about R18.1-billion in gold assets, which have been relatively static in the last six months. “This is because most of the large investors have already acquired their full allocation in NewGold ETFs and are diversifying their investments into other-commodity ETFs,” Nedeljkovic says.

He

further states that NewGold has already been on offer for about ten years, which means that investors are keeping their holdings static for long-term returns.

He notes that there is generally a period of exceptional growth for ETFs soon after they have been introduced to the market, but they begin to slow down once asset managers reach their target percentage for the asset and then hold on to the assets.

Africa Expansion

Nedeljkovic tells Mining Weekly that Barclays Africa is aiming to expand its NewGold ETF offering to other African countries – such as Uganda, Zambia and Kenya – in the near future.

“Africa is one of the premier business destinations for Absa and its parent company Barclays. “Therefore, the firms have a strong expan- sion strategy for the continent. “The corporate and investment banking division of Barclays Africa is seeking opportunities to list NewGold and its other ETF offerings in African countries, which are selected using a variety of criteria, such as the existence of a willing exchange partner,” he says.

Nedeljkovic say, before an ETF is listed in a country, Absa Capital investigates whether there is sufficient demand to list the product – sometimes there is more flexibility, such as when a country has high regulatory demands, but the demand remains high enough to validate the listing.

Barclays Africa also considers whether Barclays has a presence in a country, whether the client base is strong enough and whether the potential institutional investment is high enough, as the predominant channel for gathering meaningful assets is through institutional investors.

Nedeljkovic explains that the process to list an ETF in African nations other than South Africa is complex, as it involves more than just applying for a listing, as is the case in South Africa. Other African nations require the entire framework to be created, which includes, but is not limited to, the establishment of listing rules, infrastructure and trade methods.

“There is a very complex set of regulatory, operational, technical and information technology issues that need to be navigated when establishing an ETF in another African country,” Nedeljkovic notes, adding that each country the company lists an ETF in has different delivery plans, owing to differences in regulatory requirements.

“Some of the countries that Barclays Africa has listed ETFs in do not yet have electronic trading systems, which can be challenging for them to efficiently trade on the market” he comments.

Nedeljkovic says Absa Capital aims to increase the number of ETF types it offers and to offer other-commodity ETFs in countries in which it has secured listings.

Providing a Hedge
Nedeljkovic notes that gold ETFs act as a hedge against currency depreciation, owing to the gold price being denominated in dollars, but traded in the currency of a country.

“If the gold price in dollars is fixed but the rand:dollar exchange rate drops, the rand price of the gold ETF will increase, as it is traded in rands.

“Further, gold acts as a hedge against a depreciating dollar, owing to an inverse correlation between the price of gold and the dollar exchange rate against the basket of currencies of its trading partners, such as the euro and the yen. “Therefore, if the dollar weakens against other currencies, the gold price will often increase, making gold ETFs a good defensive investment, ” he explains.