LONDON, April 16 The meteoric rise of exchange-traded gold products over the past decade has now exposed thousands of small investors to losses after years of gains in an asset previously the preserve of eccentrics, collectors and central banks.
The gold price on Monday recorded its biggest ever daily fall in dollar terms - at one point it was down $142 an ounce, and that capped a 20 percent drop so far this year after rising year on year for 12 years.
Exchange-traded products (ETPs) backed by physical inventories of the precious metal can be bought and sold like a stock. They were originally designed for institutions and hedge funds to take positions on sectors and asset classes, and the most common form of ETP is the exchange-traded fund (ETF).
According to Boost ETP, a London-based ETP provider for institutional clients, a total of 54 gold-backed ETPs hold 81 million ounces of the metal worth around $130 billion as of end-March.
This volume of assets under management amounts to a 'people's central bank', which would rank as the fifth-largest central bank in the world, Boost's co-chief executive, Nik Bienkowski, said.
"Gold ETPs have democratised gold investing ... Before they existed it was very difficult to invest in gold," he said.
London-based research firm ETF Global Insight estimates retail investors account for about 40 percent of the ETF market in the United States. Ernst & Young recently published a survey predicting steady growth in European ETF assets from 15 percent of the total currently.
Some asset managers such as Terry Smith, head of Fundsmith, have warned small investors against these products, saying they should be seen as a preserve for hedge funds and high-frequency traders.
Some of the retail investors caught out by Monday's gold price crash may now agree.
Investors have pulled out of the largest ETF, New York's SPDR Gold Trust this year, reducing its holdings by 6.3 million ounces so far to 37.1 million ounces as of Monday.
Alan Miller, former fund manager at Jupiter and New Star and now running wealth management boutique SCM Private, warned that many people will be nursing heavy losses after rushing headlong into gold.
"I really do not think you can estimate the amount of money 'safely parked' in gold that can quickly head for the exit when people realise they have bought into the latest bubble," he said.
"When seemingly every taxi driver holds something, and today that thing seems to be a gold fund, it normally marks the top."
But while many say that investors who put money in gold ETPs will be smarting from bets that went bad this year, investors dismiss arguments the rout has damaged the credibility of exchange-traded products.
Rob Burgeman, a divisional director at investment manager Brewin Dolphin in London, who sits on the asset allocation committee, said the products had demonstrated high levels of liquidity and functioned well throughout the falls.
"What ETFs have shown is even in volatile markets, people have still been able to trade in these things. They might not like the price they can trade at but that's true of any investment," Burgeman said.
Kevin Quigg, New York based global head of ETF sales strategy agreed.
"Gold ETFs track that downward price move in exactly the way they are supposed to," he said.