Exchange-traded gold seen pushing up prices

LIMA, Peru (Reuters) - The market for exchange-traded gold funds (ETFs) could be worth $100 billion (54 billion pounds) within a decade, driving gold prices well above $1,000 an ounce, bankers and fund managers say.

ETFs, which were created three years ago to dramatically lower the barriers to invest in gold, permit investors to buy bullion with the same ease as buying equities and without taking physical delivery of the precious metal.

With 14.6 million ounces of bullion now in the hands of investors via ETFs, the funds are worth $9.8 billion, according to the World Gold Council, who helped devise the funds.

"Gold ETFs could easily reach a market capitalization of $100 billion in the next 10 years," John Hathaway, a senior portfolio manager at the U.S.-based Tocqueville Fund, told delegates at a gold conference in Lima on Friday.

That view was echoed by George Milling-Stanley of the World Gold Council. "We began selling ETFs in New York 16 months ago with a goal of making the $1 billion mark in a year. We reached that level in three days," Milling-Stanley told Reuters.

Eagerness to invest in gold, the definitive low-risk asset because of its inherent value, has soared in recent months as bullion burst through 25-year highs to $682 an ounce. It is forecast to reach $850 in the next 18 months, analysts say.

Instability in the Middle East, a weak U.S. dollar, concerns over Iran's nuclear ambitions, high oil prices and global inflation have pushed investors toward bullion.

ETFs are also traded in London, Sydney, Johannesburg and Paris.

Simon Village, director of Gold Bullion Securities Ltd, who helped develop ETFs, said the huge market capitalization could be achieved because mutual funds need to diversify only about 2 percent of their portfolios into ETFs to achieve "whacky numbers like $100 billion."

LIAR'S POKER?

Village said that before ETFs existed it was almost impossible for a small investor to buy gold, an asset that acts as financial insurance unlike money, which is controlled by governments and is easily devalued by economic crises.

"If you had $10,000 and you tried to put that into gold a few years ago, you couldn't. Now you just ring up your broker and you invest and you get your certificate as a guarantee."

Bullion bankers in Lima said ETFs will play a key role in taking gold prices above $1,000 an ounce over the next two years as increased demand outstrips scarce gold mine supply.

"I don't really see anything to stop gold reaching the $1,000 level and beyond," said Jeffrey Rhodes, regional head of Standard Bank's resource banking arm for the Middle East and Africa. "This rally is much broader based than at the end of the 1970s. That means it is also likely to be longer lasting," he told Reuters.

Gold production grew 2 percent in 2005 to 2,519 tonnes, but demand for the precious metal from jewelry alone was 2,712 tonnes last year, Rhodes said.

"Gold is very underpriced and investment demand is only just awakening," Hathaway said. "People are realizing that you can't play liar's poker with gold like you can with money," he added.