Investors Decide: In Gold We Trust

By JOHN JANNARONE Call it the GLD rush. As the financial system teeters, investors have fled to gold as a haven. Exchange-traded funds have made it easy. ETFs such as SPDR Gold Shares -- ticker GLD -- are a direct bet on bullion prices. The trusts have to buy physical gold to match investment levels. Having doubled the gold in their vaults in a year, the stash is worth $45 billion. That's tiny in the context of big asset classes like stocks. But gold's scarcity keeps the market small. If ETFs continue to grow fast, they could start to create a real squeeze in gold, with its limited supply. Trusts have added 306 metric tons of gold to their vaults in the first seven weeks of the year, says Barclays Capital Analyst Suki Cooper. That's just short of the 322 tons added in all of 2008. If that rate were to continue, this year's ETF purchases would surpass the 2,120 tons procured for jewelry in 2008, replacing it as the top source of demand. Lately, gold ETFs haven't blinked in the face of typical obstacles. The dollar has gained nearly 9% against the euro this year, normally a cue for gold to weaken. But the metal has gained 13%. Ultralow inflation in most countries would also be negative for gold normally. But some investors are betting on a return to inflation as governments try reflating their economies. Others are hedging the risk of financial collapse. Either way, individual investors and hedge funds are making room for gold in their portfolios. ETFs make the task easier. They are freely tradable, and cheaper to own than it would cost for an individual to locate and secure the physical commodity. UBS reckons gold coins command a 10% convenience premium. Barring a sudden improvement in financial markets, investor fear should preserve gold's allure -- even though unlike other assets, it generates no yield. But ETFs won't always be a friend to gold, by underpinning physical demand. If, and when, investors decide the game is up, ETFs will have to liquidate holdings as people sell. Just as they are squeezing the market now, they could flood it when the frenzy ends. Write to John Jannarone at john.jannarone@wsj.com