Index innovation has come to the rescue in the form of futures tracking gold indexes, and now a previously index-only tool - the ETF - is gaining the ability to trade an underlying portfolio of gold bullion on the stock market like any ordinary equity. The ETF structure has come full circle, as it had its origin in the mind of a resourceful commodities trader, Nate Most. While working at the AMEX, Most had the idea of packaging a mutual fund into a single certificate (like the pieces of paper that represent underlying commodities and trade on commodities markets) that could then be traded in smaller pieces as individual stocks representing a small portion of the larger portfolio. (See Most's upcoming article in the Q1, 2004 issue of the Journal of Indexes).
What we can say with some degree of confidence is what the structure of the Gold Council's ETF, should it make it though the SEC largely intact, will look like, because the funds that have already been launched in Australia and in the United Kingdom will serve as models.
In short, the London-based World Gold Council, a trade group interested in marketing gold to individuals, will serve as the sponsor for an ETF that will be composed of gold bullion. Equity Gold Trust, which will trade on the New York Stock Exchange under the ticker GLD, will be backed by gold bullion deposited in a vault in London. The initial share offering will be at a per share price based on one-tenth of an ounce of gold at the time of the offering.
Australians First To Market With Gold ETF
Australia won the race to list the world's first gold-backed ETF (and the first ETF based on any commodity for that matter) by listing an ETF backed by gold bullion. And why not? The international symbol for Australia is, after all, AU. 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 portfolio. 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 new ETF has grown exponentially in assets in its first 10 months of existence, and its twin fund in the U.K. (more detail below) has made and even bigger splash.
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, while 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 and former CEO of the California Public Employees Retirement System (Calpers), a position he held from 1994 through until he began working for the Gold Council in September of 2002.
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 a 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 a small cash amount.) Graham Tuckwell, chairman of Gold Bullion Limited, said that shares clear in T+3, which works well logistically for creations, as gold on the Londonmarket clears in T+2.
"The gold market in Londonhas tremendous liquidity, and this underlying liquidity is reflected in the close tracking of the shares to the price of gold." said Tuckwell.