Merk Gold ETF To Be Redeemable In Bullion

May 08, 2012

Axel Merk seeks to put gold bug objections to rest by making his proposed gold ETF more easily redeemable in bullion.


(Updates to clarify that existing gold ETF shares can be redeemed for bullion, but only in amounts of at least 100,000 shares.)


Those who invest in the Merk Gold Trust that Merk Investments put into registration last month will be able to redeem smaller amounts of shares of the proposed ETF for actual bullion—a marketing hook that sets it apart from existing physical gold ETFs and could put to rest reservations with gold ETFs that can’t readily be redeemed into actual gold.

“Investors who would like to take delivery of Gold Bars in exchange for their Shares (Delivery Applicants) may submit Shares to the Trust in exchange for Gold Bars,” the proposed ETF’s prospectus said—a new twist that may add to the allure of gold at a time when many believe it’s the only true store of value since the financial crisis of 2008-2009.

While it’s not at all clear that investors would even take advantage of this convertibility feature, it seems a fair bet that giving shareholders the option to turn their paper certificates into physical gold pretty much obviates objections raised by some of the more fervent gold holders who believe that gold—as in actual bars or coins—is really what investors should own.

More to the point, the plan might take off the table suspicions some gold investors have with physical gold ETFs that don’t allow for shares to easily be converted into actual gold. The most ardent gold bugs are quick to suggest that because current ETFs can’t be converted into bullion, it might be possible that they don’t actually hold gold. ETF sponsors are dismissive of such suspicions.

In the any case, it appears the Merk gold ETF will attempt to distinguish itself insofar as the amounts that can be redeemed can be as small as tiny bars of gold and even coins, whereas industry sources say existing gold ETFs require amounts equal to 100,000.

That 100,000-share threshold amounts to a sum equal at current prices to about $15.4 million for investors in State Street's SPDR Gold Shares (NYSEArca: GLD). In other words, it's outside the capability of individual investors and requires the involinvement of authorized participants, the big players at the center of every ETF's creation and redemption mechanism.

The Merk gold ETF, which will be listed on Arca, the New York Stock Exchange’s electronic trading platform, will come with an annual expense ratio of 0.40 percent, according to the fund’s prospectus, dated April 20. That’s the same annual fee as GLD's, the $67.35 billion physical bullion fund, which is the second-biggest ETF in the world.

The Merk Gold Trust, which will trade under the symbol “OUNZ,” will hold London “good delivery bars” as well as other gold bars and coins with a minimum purity of 995 parts per 1,000, according to the filing. The ETF’s net asset value will be determined at the end of the London trading day, meaning its price in New York could at times deviate from the end-of-day NAV.

The costs of redeeming OUNZ shares will go up the lesser the amount being redeemed, and any such redemptions won't be taxable events.

But reselling any shares converted into bullion will be taxable -- just one issue that would dog anyone who does redeem OUNZ shares for real gold. Indeed, where that gold will be stored and the value lost in all the transactions costs are likely to be exorbitant.

The Merk Gold Trust is the second ETF Axel Merk’s Palo Alto, Calif.-based firm has put into registration this year.



In March, his firm put an ETF version of his flagship mutual fund, the $600 million Merk Hard Currency Fund, into registration in what amounted to the latest indication that heavy-hitters in the world of active fund management are turning their attention to ETFs.

The German-born Merk, known for his expertise in the world of currencies, told IndexUniverse in a recent interview that he believes strongly that the ETF—armed with features such as intraday tradability and a creation and redemption mechanism that keeps its real-time price and NAV close together—is destined to play a big role in the world of money management

The decision to bring a gold ETF to market appears related to the plans for the Merk Hard Currency ETF to the extent that Merk Investments indicated in the filing last month that the currency ETF’s possible investments in gold were likely to be implemented through exchange-traded products, including ETPs sponsored by Merk itself.

Apart from Merk Investments' internal objective of possibly using its own ETFs to obtain gold exposure for the Merk Hard Currency ETF, the yellow metal remains attractive to those worried that economic uncertainty and the loose-money policies of central banks in the world since the market meltdown in September 2008 are debasing the dollar and other currencies, like the euro.

While gold prices are down sharply in the wake of Greek and French elections over the weekend that have brought new uncertainty to the eurozone and its efforts to bring its debt crisis under control, gold prices are still up more than 2 percent year-to-date. Spot prices were around $1,600 a troy ounce early on Tuesday afternoon, down 2.3 percent from late on Monday.

Gold prices reached a high in September 2011 of around $1,900 an ounce. Private investment demand was almost a third of total annual gold demand at the end of 2009—up from 12.9 percent in 2000, the filing said.

GLD is up more than 247 percent since it was launched in November 2004, according to data on Google Finance.

Merk’s filing said that J.P. Morgan will serve as custodian of the trust, while Bank of New York Mellon will serve as trustee.

SSgA’s GLD, as noted, has an annual expense ratio of 0.40 percent, compared with 0.25 percent for the $9.52 billion iShares Gold Trust (NYSEArca: IAU).


Find your next ETF

Reset All