NEW YORK (Reuters) - Gold and silver should continue to benefit from the booming market for metals-backed exchange traded funds (ETFs), which accounted for nearly $300 million worth of precious metals buying last week.
But experts cautioned not to overestimate the impact of ETFs on bullion and silver prices because the markets are still mainly driven by consumer demand, including jewelry consumption.
Growing popularity of the ETFs can be seen by the growth of gold and silver held by the sponsors of the funds, which buy a matching amount of the precious metal from the market to keep in their vaults to back shares.
StreetTRACKS gold shares the world's largest gold ETF accounting for more than 80 percent of the metal held by all such funds, added 10 tonnes of bullion last week and more than 37 tonnes just in February so far. It now holds 487.5 tonnes of gold, or 55 percent of the total supply in the fourth quarter in 2006.
Barclays Global Investors International's iShares silver trust a silver ETF, also saw its holdings rise 31 tonnes last week to about 3,920 tonnes.
Peter Schiff, president of Euro Pacific Capital, said that ETFs widened the gold and silver markets because they drew in new investors, such as pension funds, who might not have bought any precious metals had there been no ETFs.
Outstanding performance of the precious metals also added to their appeal. Both gold and silver have returned double-digit gains since they hit lows in early January.
Even after Tuesday's sell-off following tumbling stock markets, spot gold was quoted at $670 an ounce on Wednesday, not too far away from its 27-year peak of $730 set in May of last year, spot silver was quoted at $14.15 an ounce, compared with its 25-year high of $15.17.
"There is no question that the ETFs added another element to the market. There is the periodic necessity for the ETFs to come in and buy metals," said Bill O'Neill at LOGIC Advisors.
James Steel, analyst at HSBC, noted that silver ETFs were more bullish than gold's because holdings by all silver ETFs combined were a greater proportion of the total market stock compared with that of gold.
Steel also said that ETF investors, including pension funds and high net-worth retail individuals, tend to have a longer-term outlook on the market, and that short-term traders preferred trading more volatile futures.
There are about 10 bullion ETFs around the world. ETFs are listed on stock exchanges and track spot prices.
Two companies have already launched their bullion ETFs in India, the world's biggest consumer of gold, and five other companies have lined up similar products.
NOT MAIN DRIVER
Even though most experts agreed that ETFs were positive to prices, some contended that such funds alone were far from being a major force in the bullion and silver markets.
Scott Meyers, senior trading analyst at Pioneer Futures, said that he did not think ETFs had much impact on prices because trading in gold and silver was now mainly electronic and had become more technically driven than ever.
"The volume of the ETFs that they are bringing to the table is not going to be significant. It won't move markets, in other words," Meyers said.
LOGIC Advisor's O'Neill said that ETFs added some fuel to the drive when the markets were bullish, but ultimately fundamental factors like jewelry demand would still be the main driver of prices.
Jewelry consumption was about 70 percent of total demand in the fourth quarter of last year, compared with 8.5 percent from ETFs, according to the World Gold Council's most recent demand trends survey.
Frank Holmes, chief executive of U.S. Global Investors, a $5 billion fund with mining holdings, noted that ETFs got a boost from a unique group of investors -- social responsibility funds and pension funds which were generally not allowed to participate in commodities before the launch of ETFs.
"There is a whole community of investors that are anti-mining, anti-energy, but they'd go and buy the end product (ETFs), which is bizarre," Holmes said. He added that those investors bought gold as a hedge against the falling dollar.
