An unprecedented rush to a Japanese gold-backed fund is worrying markets

The ongoing gold rush has sent the price of Japan’s largest exchange-traded fund backed by the precious metal soaring to a record high that exceeds the value of the underlying asset, underscoring the risks facing investors in a market seeing sharp volatility. The price of the Tokyo-based Japan Physical Gold ETF — the only fund of its kind in the country backed by domestically stored gold — rose 16% early this week relative to its net asset value. It comes even after the Tokyo Stock Exchange warned investors on Friday about the need to pay attention to the fund’s net asset value, as its deals have recently recorded a price premium on an ongoing basis. Gold’s decline raises concerns Concerns were heightened after the spot price of gold saw its biggest drop in more than 12 years on Tuesday, prompting some analysts to warn of the possibility of a reversal in the fund’s upward trend. Read more: Gold and silver prices fluctuate after sharp decline as rally winds down. Satoru Yoshida, a commodities analyst at Rakuten Securities Inc, said that if the gold market continues to be weak, “retail investors may sell en masse”, increasing the risk of suffering significant losses. Data compiled by Bloomberg showed the price premium on the Japanese Gold Fund, which stood at 1.25 trillion yen ($8.2 billion), widened to become the highest among its global peers. The fund’s price fell 11% on Wednesday after a 6.3% drop in the gold price on Tuesday. Contrast between the fund and the gold market The fund stands out compared to its global peers with similar structures, such as the “Goldman Sachs Physical Gold Fund,” the “Aberdeen Physical Gold Equity Fund,” and the “iShares Physical Gold Fund,” which have not seen a gap between the net asset value and the trading price of more than 4% during the past decade not. “The decline in the correlation between fund prices and the gold market, along with investors buying at high prices, is cause for concern,” Kei Okazaki, senior director of the Tokyo Stock Exchange’s ETF market development division, said in an interview. Japanese gold rush These unusual moves highlight Japanese retail investors’ renewed appetite for gold, as well as a weak yen and some local retailers ceasing to sell the metal, factors that some analysts say have accelerated the flow of money into gold ETFs. Yoshida of Rakuten Securities explained that the decline in the value of the Japanese currency has led investors to expect greater profits from gold, which is priced in dollars. One of the reasons for the popularity of this fund is that investors can convert their holdings in the precious metal for a fee. Also read: Sharp losses surprise gold and silver after historic rally. When the Japanese gold fund’s trading price exceeds its net asset value, Mitsubishi Corp., the fund’s exporter, buys actual gold, and securities companies in turn sell the newly created fund units in the market, usually narrowing the gap. Secure real gold. A representative of the Mitsubishi subsidiary responsible for the purchase of precious metals said that the company obtains gold from both local and foreign sources, but it is finding it difficult to keep up with the increasing demand and the rapid rise in prices. Other gold funds in Japan are not backed by locally stored gold. The iShares Gold ETF invests in a London-based ETF backed by physical gold stored abroad, while the NF Gold Price ETF is based on securities linked to gold futures prices. You may be interested in: Asian shares fall under pressure from a wave of selling in shares of precious metals companies. Some analysts said that the broader positive outlook for gold will strengthen the Japan Physical Gold Fund in the long term. In fact, the fund quickly pared its losses to around 7% on Wednesday afternoon. “The fund has not yet reached a point where the price and net asset value will rapidly converge, as access to physical gold is still difficult for retail investors,” noted Satoshi Harada, a researcher at NLI Research.