February 28, 2005
ANDREW WILLIS
Globe and Mail

Gold mining companies can expect a surge in demand for bullion on the strength of explosive demand for gold-linked exchange traded funds, already the most successful such launch in financial history.

The World Gold Council spent three years developing a new security that would pump up gold demand by giving investors the opportunity to buy bullion that trades on the New York Stock Exchange, with the price of the security based on the price of a 10th of an ounce of gold.

The securities have now created demand for more than $2-billion (U.S.) of gold bullion.

The StreetTRACKS Gold Trust was launched on the NYSE in November, along with Gold Bullion Securities on British and Australian exchanges. It was the first exchange traded fund linked to the price of a commodity. Other such funds have tracked stock indices.

UBS Securities Inc. led the offering, and State Street Global Advisors Inc. runs the ETF program. In January, a unit of Barclays Bank PLC debuted a rival gold-backed ETF.

"To be successful, we felt the ETF had to attract $1-billion worth of investment within a year. It attracted that support within three days," said James Burton, chief executive officer at the World Gold Council.

In an interview in Toronto last week, Mr. Burton said: "There are estimates within our organization that this ETF may eventually reach $20-billion to $30-billion in size."

The ETFs represent new demand for what mining companies produce, as each time one of these securities is sold, the fund's backers set aside bullion in a bank vault. Just a few months after their launch, these new ETFs already account for 7 per cent of world gold production.

"What we didn't count on is the seemingly limitless applications that buyers would find for the ETF," Mr. Burton said. He said the growing liquidity of the security, compared with the cost and bother of actually owning gold bars, have seen the ETF purchased by investors, hedge funds, central banks and gold companies, which use the ETFs as a way to invest any cash holdings.

Investment dealers are now working on other commodity-linked securities, including ETFs based on the price of silver and crude oil.

In another move that will add to the demand for gold, last week's budget proposed making gold bullion an RRSP-eligible investment.

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