Australia has won the race to list the world's first commodity-backed ETF, by listing an ETF that is backed by gold bullion. The new listing of Gold Bullion Securities (ASX Code: GOLD) on the Australian Stock Exchange enables investors to buy shares that are priced at the equivalent of one-tenth of an ounce of gold.
The new ETF provides investors with the opportunity to buy a physical interest in a bar of gold. Like equity based ETFs, pricing of shares is kept in check by the ability of investors to redeem shares for the underlying shares, or in this case gold of the fund. This arbitrage opportunity keeps the price of the ETF very close to the actual price of one-tenth of an ounce of gold. The physical gold is insured and held in London vaults by the custodian bank, HSBC Bank USA.
The development of the new ETF is a joint initiative between the World Gold Council and an Australian company, Gold Bullion Limited. The World Gold Council is the cooperative international marketing organization of the gold industry. Gold Bullion Limited is responsible for the management of the fund in Australia.
"In the past, many investors have found investing in gold a cumbersome and costly process. Retail and institutional investors have encountered barriers to entry in the form of difficulties with purchase, storage and insurance. The securitization of gold, as proposed by Gold Bullion Limited in this Australian initiative, is a means of addressing these issues," said Jim Burton, chief executive officer of the World Gold Council.
The new gold bullion ETFs are created and redeemed in baskets valued at AU$500,000. The creation basket is a combination of gold bullion and some small amount of cash. (By way of comparison, in the U.S. for example, with equity index ETFs, creation units consist of 50,000 ETF shares and some small cash amount.) Graham Tuckwell, chairman of Gold Bullion Limited, notes that shares clear in T+3, which works well logistically for creations, as gold on the London market clears in T+2.
"The gold market in London has tremendous liquidity, and this underlying liquidity is reflected in the close tracking of the shares to the price of gold." said Tuckwell.
The launch in Australia likely presages a series of future launches worldwide, not only of bullion-based ETFs, which will certainly be launched in other countries, but also of other commodity based ETFs. S&P recently launched a new commodity index, for example, explicitly mentioning the possibility of an ETF launched on a broad, portfolio-stabilizing commodity index (which would exclude gold). Another possibility would include an ETF based on crude oil s, for example.