The influence of gold ETFs on

Abstract

Gold stocks have historically traded, and continue to trade, at inflated multiples relative to the net asset value of the holding company and the rest of the market. Therefore one of the most vexing questions for investors in metal equities seeking to make a ‘buy’ case on a gold stock is the valuation of the stock and the extent to which the premium makes the stock expensive relative to other gold investments. The purpose of this research was to identify how the recent development of the advent of gol d exchange traded funds (ETFs) on major stock exchanges around the world could influence analysts’ recommendations for direct investment in gold in favour of South African (SA) gold stocks at a premium. Semi-structured interviews were conducted with a total of 28 gold analysts based both in SA and in New York City, United States of America (USA). A content analysis was carried out on the data gathered during the interviews. The responses were presented as frequency counts of the concepts extracted from the interview transcripts. The findings of this research suggest that the impact of gold ETFs on analysts’ recommendations is substantial. The study suggests that investing in gold ETFs can be an attractive alternative way of participating in gold price movements with lower risk than gold stocks. The conclusion of this research suggests that it can be argued that the advent of ETFs does take away some of the unique appeal that gold stocks previously held, but that gold ETFs are a different type of investment from gold stocks. Whereas gold ETFs appear to have more investment appeal, SA gold stocks are trading options with inherently higher risk, but which potentially offer greater returns. The demand for higher risk investments like gold stocks is not likely to dissipate given the greater leverage to the gold price that they offer