New products seek to capitalise on gold demand

Gold has always been a safe haven in times of turmoil and volatility, and it's certainly been playing that role in recent weeks. The price closed at $1,214.14 an ounce on Friday, rallying for a fifth consecutive day and after climbing $36.24, or 3.1%, in May and 10.9% year-to-date.

And the World Gold Council (WGC) -- set up by mining companies to stimulate and sustain demand for the metal -- believes demand will continue to rise.

US asset manager Invesco and the Singapore Mercantile Exchange (SMX) hope it does, following the launch of the Invesco Gold & Precious Metals Fund's initial public offering in Hong Kong last week and the SMX's May 21 announcement of its first gold futures contract.

The Invesco fund primarily invests in the equity and equity-related securities of companies engaged chiefly in exploring for, mining, processing or dealing and investing in gold and other precious metals, such as silver, platinum and palladium, as well as diamonds.

"We believe the scarcity of non-renewable resources means precious metals are worth investing in," says Desmond Ng, Invesco's chief operating officer and head of sales and marketing for Asia ex-Japan. "The supply-demand gap of precious metals is expected to widen in the coming years."

The WGC, for one, says in its Q1 gold investment digest last week that it expects demand to be strong this year. It cites factors including growing demand for jewellery in China and India, as well as an increase in European and US investment in the context of continued economic instability, sovereign risk and the threat of a 'double dip' recession.

Moreover, central banks have become net buyers of gold since the 2008/2009 financial crisis, adds the Council, and many such institutions have started to increase gold holdings to diversify their foreign reserves away from the world's major currencies.

For example, over the past five years, China's demand for gold has increased at an average annual rate of 13%. The country has now surpassed Switzerland as the world's fifth largest sovereign holder of gold reserves, and Chinese consumption may double over the next decade, according to the WGC.

Andrew Lees, lead portfolio manager of the new Invesco fund, says: "Gold provides protection against expected weakness in fiat currencies. As a result, factors such as anticipated inflation, deteriorating GDP, and government indebtedness -- which all tend to negatively impact a currency -- have the opposite effect on gold."

The fund can invest in companies involved in exploring, developing or directly investing in gold and other precious metals; and in diversified metals and mining funds, including up to 10% of its net assets in exchange-traded funds and exchange-traded commodities.

The IPO period is between May 24 and June 18, and the product will launch on June 21. The IPO price is $10 per share, and the minimum investment is $1,500.

Meanwhile, SMX, a commodity derivatives exchange that is slated to go live in August, says its gold futures contract will be the first product to be launched both in pilot testing and subsequently when the platform starts trading. The contract will be physically delivered and provide a convenient investment and hedging vehicle, says the exchange.

"The launch of the gold futures contract is an important milestone for both SMX and Singapore as it will be physically delivered in the island republic," says Thomas McMahon, chief executive of SMX. "Singapore is the major crossroad for gold-producing regions of South Africa, Australia and South America.

"Against the backdrop of a global flight to investment safety and the trend of a migration of Asian capital and investment back to Asia, the ability to price, make or take delivery of physical gold in Singapore is a compelling proposition," he adds.

The futures contract will be traded every working day from 09:00 to 22:00 hours Singapore time, in units of 32 ounces per unit, for the months of February, April, June, August, October and December.

SMX will also offer contracts for trading other precious metals, as well as base metals, energy, agriculture commodities, commodity indices, currencies and other financial instruments.