Since first appearing in late 2003, physical gold ETFs have provided a popular andeasy way for investors to gain gold exposure without having to resort to physicalgold or gold futures. The format has seen tremendous growth with cumulative ETFgold holdings now approaching 2,100 tonnes - at current gold prices, the marketvalue of these holdings is over US$90 billion. By comparison the aggregate marketcap of gold equities that trade in Toronto, Australia, South Africa, New York, andLondon, totals about US$340 billion. On this basis, the physical gold ETFsrepresent approximately 21% of the combined market capitalization of gold equitiesand the physical gold ETFs.

Given the rapid uptake in the physical ETFs, there has been much speculation thatthe ETFs have siphoned off investor demand that traditionally would have flowedinto gold equities, the impact of which would likely be seen through reduced equitymultiples. We took a look at this issue back in March 2009 and concluded at thetime that gold equity multiples had contracted amid rapid growth in physical ETFdemand (see here).

We have taken a new look at this issue and while gold equity multiples haveindeed contracted from historicallevels, they have done so in tandem withother commodity equities that don’t have similar physical ETFalternatives,including base metals and oil. The multiple contraction appears more likelyrelated in our view to declining multiples in the overall equity market andtherefore we expect they should improve as overall market conditionsnormalize following the 2008/2009 market crash.