Redeemable Gold ETFs Could Be Costly

March 28, 2013

 

“There are costs and hassles involved in withdrawing, fabricating or buying, and then shipping smaller retail gold products to a private investor,” Adrian Ash, head of research for Bullion Vault, told IndexUniverse, noting that these costs in general can quickly escalate, even if he was not commenting directly on either of the funds.

In fact, the costs to withdrawal small amounts of gold from a vault in London can be as much as three times greater than the fee charged for larger amounts, by some estimates—costs that could prove to be prohibitive for smaller investors if they get passed through in their entirety. At BullionVault, the fee for gold withdrawal goes from 2.5 percent by value for whole 400 oz. bars to 7.5 percent for amounts below that level.

“That’s perhaps prohibitive compared to the best current retail dealer quotes, but we’re intended as a cost-efficient store of value, free from counterparty risk, and not as a route to putting physical metal into your hand,” Ash noted.

“As it is today, an individual wanting to switch from ETF exposure to possessing physical bullion could simply sell their stock, and then use the cash raised to arrange the purchase directly themselves,” he said. “That way they get to control all costs.”

Taking ownership of gold also implies several other costs such as shipping fees—most likely from Europe-based or Asia-based vaults to the U.S.—insurance and storage costs once investors have the physical metal in hand.

Finally, there’s the cost—or value—of liquidity. GLD, for instance, trades on average some $2 billion a day, with a bid/ask spread of about 1 ½ cents—practically a negligible cost. That bid/ask spread is an implicit cost of owning the trust, outside of the explicit expense ratio fee, which makes liquidity an important factor in the cost structure of these ETFs.

As the filings currently stand, no details are known about how Merk and Van Eck plan to make this complex cost structure accessible to smaller shareholders, but at the end of the day, as State Street’s head of ETF Sales Strategy Kevin Quigg put it, investors “will have to weigh all costs of ownership and make sure they’re consistent with their long-term goal.”

 

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