As the price of gold continues to soar, reaching unprecedented heights, the allure of gold stock ETFs has captured the market's attention like never before. Among them, the Huaxia Gold Stock ETF has become a hotspot for investors, with its shares experiencing a rapid surge that has led to a price cap over three consecutive trading days, alongside a staggering premium exceeding 30%. This phenomenon reflects a broader trend where gold stock ETFs are being aggressively acquired, motivated primarily by the relentless rise in gold prices across global markets.

The trading dynamics surrounding these ETFs have been fascinating. On April 3rd, after a delayed opening, the Huaxia fund displayed a remarkable spike in value, ultimately hitting its price cap for the third time in a row. Comparatively, the Yongying Gold Stock ETF, which tracks the same index, experienced a much steadier performance, closing at just a 4.29% increase and a mere 0.72% premium. The stark divergence between these two ETFs raises questions about market psychology and investor behavior.

The driving force behind this ETF frenzy has undoubtedly been the rapid escalation in gold prices. Since the beginning of April, gold has consistently reached record highs, with the COMEX gold futures contract surpassing $2,300 per ounce on April 2nd, a significant indicator for market analysts. Just two days later, the spot price of gold in London also broke the $2,300 barrier, setting a historical benchmark for precious metals.

Currently, the market boasts a total of 16 gold-themed ETFs, most of which replicate the Shanghai Gold Exchange's gold spot contracts, denominated in Renminbi. However, ETFs directly associated with gold stock indices remain limited. It wasn't until October 2023 that the first batch of funds tailored to gold stock indices received approval, with only the Huaxia and Yongying funds operational at present. This scarcity may contribute to the heightened interest and volatility surrounding these investments.

One interesting aspect about gold stock ETFs is their performance elasticity compared to standard gold spot contracts. Statistics suggest that, over the past three years, gold stocks have exhibited a beta of approximately 1.3 times that of physical gold prices when gold prices have increased, and 1.5 times during major upward price movements. This relationship hints at a burgeoning opportunity for investors willing to navigate the volatility inherent in gold stocks.

As of April 3, most gold-themed ETFs have recorded annual gains between 10% to 12%, yet the two gold stock ETFs stand out with increases exceeding 20%. The Yongying Gold Stock ETF has maintained a return of 28.17% since inception; however, the Huaxia fund has truly outshined its peers with a remarkable 79.49% increase since its launch in January 2023. Nevertheless, despite its impressive performance, the Huaxia fund’s market cap is still relatively modest, with just 39.13 million units outstanding, reflecting a total fund size of approximately 56.89 million yuan.

The extraordinary gains attributed to the Huaxia Gold Stock ETF have prompted discussions about the impact of speculative trading on its valuation. During the brief window from March 28 to April 3, it recorded a significant 47.32% jump across five trading sessions, leading to the price cap phenomenon. However, such rapid price escalations come at a cost; the Huaxia ETF reported a premium rate of 30.03% as of the April 3 market close, indicating a critical juncture in investor sentiment and potential risk.

In such situations, ETF managers often issue advisories to alert investors about the risks associated with significant premiums. Stakeholders are cautioned that unrestrained investment could lead to substantial losses, prompting the fund to implement temporary trading restrictions aimed at protecting investors. High premiums can often indicate explosive demand; however, as market conditions stabilize and arbitrage opportunities emerge, these premiums may gradually diminish, returning ETF prices to more sustainable levels.

The turbulent market earlier this year showcased similar dynamics, with the premiums on certain cross-border ETFs soaring beyond 20%. Yet, as international market conditions softened and arbitrage entrants surged, many ETFs saw precipitous declines in their previously inflated valuations, underscoring the risks inherent in chasing market fads.

So what has allowed the Huaxia fund to maintain its lofty premium during this time? Besides the anticipated rise in gold prices fueling investor speculation, a critical factor is the composition of assets within the gold stock ETFs. These ETFs include not only domestically listed A-share companies but also gold mining stocks listed on the Hong Kong Stock Exchange. During the closure of Hong Kong markets on March 29 and April 1, restrictions were placed on stock exchanges, limiting the ability for investors to redeem shares. This scenario has inevitably confined the arbitrage opportunities available to investors, leading to the continued elevation of the Huaxia ETF’s price premium.

Ultimately, the explosive growth of gold stock ETFs can be primarily attributed to the sensitivity of stock prices to anticipated gold price trends. When investors foresee further increases in gold prices, they tend to inflate the valuations of gold stocks, creating a scenario often referred to as a "Davis Double Play." A prime example is Shandong Gold, which has shown accelerated growth in its performance linked to rising gold prices.

In the first three quarters of 2023, Shandong Gold reported net profits exceeding the entirety of 2022, boasting a staggering year-on-year increase of 94.12%. Projections indicate that net profits could climb to between 2 billion and 2.5 billion yuan in 2023, marking a substantial increase over the preceding year. As for production, Shandong Gold anticipates annual increases in gold output through 2025, with expected sales volumes of 39.8 tons, 44.6 tons, and ultimately reaching 50 tons.

When we consider the broader context, it's evident that while China is home to a large number of gold-related companies, few rank as major players in the gold mining sector. In fact, only two local companies—Zijin Mining and Shandong Gold—have reported annual outputs exceeding 30 tons. Several others, including Zhaojin Mining and Zhongjin Gold, report levels between 10-30 tons, with most enterprises producing less than 10 tons annually.

Looking forward, brokerages convey a generally optimistic outlook for gold stocks. Tianfeng Securities posits that excluding inflation effects, gold prices could potentially peak above $2,400 per ounce. Historical trends suggest that gold stocks often move in sync with gold price fluctuations; however, there can be discrepancies in the timing of profit realization, with stock market gains lagging behind commodity price movements. As gold prices rise, reflecting on improved balance sheets and profit recovery within gold mining companies becomes increasingly relevant.

Nonetheless, after climbing above the $2,300 threshold, gold is beginning to face resistance, with prices fluctuating around $2,305 per ounce. Market analysts highlight that the Federal Reserve has yet to confirm a timeline for interest rate cuts, creating uncertainties regarding future monetary policy paths. Yet the prevailing market expectations for interest reductions provide robust support for gold prices, although premature trading expectations may bring about associated risks, thereby leading to potential short-term corrections in gold prices.

Amid these market dynamics, institutional holders of gold stock ETFs are reaping the benefits of rising valuations. The Huaxia Gold Stock ETF’s issuance documents signify that institutional investment accounts for a significant 57.79% of holdings, with Shanghai Dongzheng Futures holding the largest portion at approximately 20 million units. At the close on April 3, this single holding generated an impressive profit exceeding 14 million yuan, positioning institutional investors favorably in this rapidly changing market.

In contrast, the composition of holdings in the Yongying Gold Stock ETF reveals a different story, with a mixture of private equity funds and individual investors among the top ten holders. Interestingly, this fund displayed a shift towards institutional investors over its first six months, with their holdings increasing from 16.84% at inception to 60.29% later on—a telling message regarding evolving investor behavior.

The influence of brokerage capital in the gold-themed ETF landscape is striking, with major firms like CITIC Securities and CITIC Jiantou prominently represented among the top holders of various gold ETFs. Furthermore, the presence of Bridgewater Associates, a highly regarded hedge fund, signals serious institutional interest in this area.

Bridgewater China has made notable investments in multiple gold ETFs, including Huaan and E Fund ETFs. By the end of 2023, various Bridgewater funds appeared among the leading holders of these ETFs. The scale of their holdings exemplifies their strategic positioning in the gold market, achieving an impressive market value in excess of 980 million yuan—indicative of solid performance despite broader challenges faced by the company abroad.

In essence, as gold prices continue to fluctuate and market participants navigate their way through uncertainties, the behavior of ETFs and their backers will undoubtedly evolve. Stakeholders, whether individual investors or institutional giants like Bridgewater, must remain vigilant in managing risks while capitalizing on opportunities presented in the ever-dynamic gold market.