Gold ETFs, TRAKRS To Market

January 01, 2004

Golden Launch in London

The London launch of the Gold Bullion Securities ETF has made an even bigger spash than its Australian cousin, which from its early 2003 launch to year-end 2003 had gained over US$100 million in gold bullion it its portfolio.

Like the Australian ETF, the London Gold Bullion Securities (London Stock Exchange symbol GBS) is also owned and run by a partnership of the World Gold Council (which markets gold and is owned by a conglomeration of large gold companies) and Gold Bullion Limited. In its first day of trading on London Stock Exchange on December 9th, GBS attracted sales of more than US$330m (£196m).

Since the U.K. fund had been trading for less than a month at publication, gold shares still entitled investors to 99.98% of 1/10th of an ounce of gold. Over time, because of fees and cost of carry, the fund will gradually have slippage that will cause its price to misalign with the actual price of the underlying gold. However, the tracking is fairly close, and we have heard discussion about the possibility of doing some sort of a periodic rebalance to bring the share prices back in line with the 1/10th of an ounce spot price of gold.

The $330 million in sales on the first day of trading means that the U.K. Gold Backed Securities put 8.2m shares to market, each one backed by one-tenth of an ounce of gold, equating to 820,000 ounces or 25.6 tons. According to Gold Fields Mineral S e rvices, the total net global investment in gold last year was equivalent to 128 tons.

What the World Gold Council is waiting to see is the degree to which there is institutional and retail demand for a gold asset class as a hedge against inflation and a declining equities market. Some industry analysts think that gold ETFs have the potential to become extremely successful, and if this occurs, it can only work to push the price of gold higher.

For the Gold ETF, the fee structure is extremely favorable to investors who might otherwise pay u p w a rds of 7% sales costs to buy physical gold. The fund has a management fee of 0.30%, a creation fee of 0.10%, and a storage and insurance fee of 0.10% for a total fee of 0.5%, which is deducted from the fund's holdings on an ongoing basis. Roughly, this is expected to translate into the following share values vis a vis the spot price of 1/10th of an ounce of gold.

Unlike with the Australian Gold Bullion Securities, which have a minimum creation amount of AU$500,000 with the London ETFs, there is no minimum creation size for ETF shares of the London Gold Bullion Securities, and no restriction in who may apply for a creation. Just apply and send your gold bars to the Gold Trust Account, and you will be issued shares. For redemption, only Approved Holders may redeem in actual physical gold, although the fund has the added feature that any shareholder can redeem shares for U.S. dollars, British Sterling or euros-less applicable fees.


Find your next ETF