By Simon Constable 

The launch of exchange-traded funds backed by gold bullion changed the way investors could access the precious-metals market.

Nevertheless, professional investors still prefer to buy or sell futures contracts when investing in gold, according to a recent report.

"Most of the institutional investment managers said they are more inclined to trade listed futures and listed options than OTC [over-the-counter] or ETF products," says the report by New York-based commodities consulting company CPM Group. The OTC market refers to off-exchange dealing in gold, frequently via banks that specialize in bullion.

That finding will be surprising to some. The introduction of SPDR Gold Shares ETF (GLD) in November 2004 was widely seen as the most significant change in the gold market since the bullion market was deregulated in the 1970s. Before that, U.S. residents weren't allowed to own gold bullion. The SPDR fund and similar ones in the U.S. and around the world now hold 2,548 metric tons of the metal, according to data from the industry group World Gold Council.

Of the investment professionals CPM surveyed, 73.4% traded gold futures and futures options, whereas 51.4% traded ETFs and ETF options. The percentages don't add to 100 because many investors use ETFs as well as futures and options.

State Street Corp., which manages the SPDR Gold ETF, disputes those findings.

"Institutional buyers mostly want ETFs; they tend to be buy-and-hold investors," says George Milling-Stanley, head of gold strategy at State Street Global Advisors and a former World Gold Council official. "They aren't interested in the speed at which they can trade; they want simple and transparent."

CPM says it found that among the investment pros it surveyed there was more perceived liquidity in the futures market, especially in the near-dated futures where most of the trading occurs.

This greater liquidity, says CPM, "was cited as one of the most important advantages of listed derivatives, if not the most important, by most of the fund managers interviewed or surveyed."

However, State Street disputes that finding, as well.

"The ETF market in my experience is still trading larger volumes than all of the futures markets combined," says Mr. Milling-Stanley.

In the CPM survey, the cost of trading various gold investments wasn't a significant issue. "Many professed not even knowing the transaction costs and cost differentials," the report says.

CPM says the transition by professional investors to futures and away from the more traditional and London-centric OTC market started in 2001 and looks set to continue. "Liquidity benefits seem likely to continue to be one of the major, if not the single most important, factor driving this ongoing shift," the report says.

Mr. Constable is a writer in Edinburgh, Scotland. He can be reached at reports@wsj.com.

 

(END) Dow Jones Newswires

August 04, 2019 22:19 ET (02:19 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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