Geoff Howie of SGX looks at investor demand for gold and other commodity ETFs, and explains some of the issues and buying considerations in this space.

Date: Aug 2011

Tags: ETFs, Commodities, Gold

• The benchmark value of commodities is increasing in line with industrialisation in developing Asia, leading global investors to look to obtain access to these products
• When investing in commodity ETFs, investors need to make sure that the ETF suits their risk profile and that they also fully understand the underlying market and the ETF structure
• Individual investors can learn from institutional investors in terms of not always looking for leveraged access to the commodity markets via a futures or over-the-counter product

In terms of investors being able to participate in the gold rally via ETFs, the SPDR Gold ETF, which trades during the Asian time zone, is accessible to all individual investors across the region, said Geoff Howie in an interview.

Traders are also able to take pair trading, arbitrage-type opportunities, for example by trading gold and at the same time taking a counter view on another commodity.

Other commodity ETFs

Howie said he expects to see global demand for commodity benchmarks, whether this is an industrial play such as copper or a soft consumer play such as cotton.

This is inevitable, he said, given the growth in developing Asia compared with developed markets. What is driving the growth is industrialisation and economic modernisation, he explained, within which commodities are a very important variable – from both a demand and a supply-side point of view.

The benchmark value of commodities is therefore increasing, he said, leading global investors to look to obtain access to these products.

Issues with commodity ETFs

When investing in commodity ETFs, however, Howie said investors need to make sure that the ETF suits their risk profile.

Just because there might either be a commodities rally or downturn shouldn’t mean that traders should be encouraged to enter the market, he said.

Instead, they need to be objective and ensure the ETF is congruent with their risk appetite and that they also fully understand the underlying market and the ETF structure.

At the same time, individual investors can learn from institutional investors in terms of not always looking for leveraged access to the commodity markets via a futures or over-the-counter product.

Sustainable demand

According to Howie, the demand for ETFs is there, and the demand for commodities is likely to remain strong given the state of the global economy and the developing nature of Asia.

When looking for an investible benchmark to tie to these countries, he said that will be less related to financial sectors and more to commodities to spur industrialisation