Origin of gold ETFs

It is a good idea to know the origin of gold ETFs (Exchange traded Funds) as that helps to understand what they are and their place in the gold world.

Gold EFTs are a way of purchasing gold for investment purposes and have some advantages over other forms of gold ownership.

Gold exchange-traded funds (or GETFs) are special types of exchange-traded funds (ETFs) tracking the price of gold. Gold exchange-traded funds are traded on the major stock exchanges including London, Paris and New York.

According to Wikipedia, "exchange-traded funds (or ETFs) are what you might call open ended mutual funds that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the S&P 500 (IVV) or the Hang Seng Index, a market sector such as energy or technology, or a commodity such as gold or petroleum; However, as ETFs proliferated in 2006 from under one hundred in number to almost four hundred by the end of the year, the trend has been away from these simpler index-tracking funds to intellidexes and other proprietary groupings of stocks."

The legal structure of EFTs tends to vary around the world but the common features such as being an exchange listing with the ability to trade continually and being are index-linked rather than actively managed continue to exist.

The idea of a gold ETF was first officially launched by a company called Benchmark Asset Management in India. They filed a proposal with the Securities & Exchange board of India (SEBI) in May 2002. It was not launched at that time however, since it did not receive regulatory approval.

The first gold exchange-traded fund was actually launched in March 2003 on the Australian Stock Exchange under Gold Bullion Securities (ticker symbol "GOLD"). Gold Bullion Securities (GBS) are fully backed by gold which is both deposited and insured. GBS was launched to give financial institutions and private investors the ability to own gold and gain exposure to the price, without the inconvenience of storing physical bars.

Gold ETFs are backed by physical gold stored in a vault. Investors can buy a share that says they own an interest in the gold to the value purchased. The EFT's custodians create or redeem blocks of shares based on market demand for the ETF. When demand for the ETF shares is high and exceeds the current stocks of gold, more gold needs to be put in the vault to back the newly created shares so under this scenario, the ETF would take gold off the open market. With the volume of gold now traded as EFT this can contribute to the value of gold increasing as less of it becomes mobile.

Experts and traders alike promote the ease of trading in gold ETFs and electronic forms of owning gold. It has become the lazy gold investors tool. No requirements for delivery, storage or resale. No security risks as the gold remains safely deposited in bank vaults around the world and even when the ownership of any portion of that gold changes, the gold itself does not physically move.

"These funds do not have to hold gold-mining shares, but gold itself," Julian Phillips, an analyst at GoldForecaster.com once explained. That impacts the gold price directly, "whereas the gold-mining shares never did," he said.

The original idea of gold EFTs may have came out of India, one of the leading users of gold. But it was the west that took it up with a vengeance!

Perth Mint Certificate Program

The Perth Mint in Australia, runs a highly successful Gold Certificate Program called The Perth Mint Certificate Program (PMCP).

This gold certificate program is designed for the individual to buy and keep gold and other precious metals without the inconvenience associated with transportation and storage of large quantities of gold. This is done by The Perth Mint issuing a Certificate confirming your purchase and which is then stored at the Mint on your behalf.

According to the Mints' website, "The Perth Mint Certificate gives you legal title to precious metals held by The Perth Mint on either a segregated (allocated) or unsegregated (unallocated) basis. The Certificate is in your name and identified by a Certificate number. The PMCP is also the only Government Guaranteed certificate program in the world, making it one of the safest ways to own precious metals."

There are two main aspects to the program. An investor can select either Allocated (segregated) or Unallocated (unsegregated) storage. Both allocated or unallocated storage accounts are covered by a Western Australian Government Guarantee so the main difference, as far as the investor is concerned is that there are NO storage fees on the unallocated option.

With the Unallocated (unsegregated) Bullion You have title to unspecified precious metal deposited in a metal account. You pay only the precious metal cost at the time of your purchase. You pay NO storage fees on this option. This is a pool of precious metal such as gold or silver and one simply 'shares' in that pool.

With the Allocated (segregated) Coins or Bars (Gold and Silver only) however, you own title to specific coins and/or bars, which are placed in a physical form in the PMCP storage facility. You pay the quoted precious metal cost, fabrication charges and storage fees at the time of your purchase. Storage fees are based on the purchase value of your precious metal at the time of purchase, so your storage costs will not rise if precious metal prices increase. Annual storage fees are collected every three years in arrears, with one year's storage payable at time of purchase.

The minimum account opening amount is USD 10,000 (AUD 5,000 for Australian/New Zealand residents) And further minimum subsequent purchases or sales are USD 5,000 (AUD 5,000).

Products included are Perth Mint allocated coins and bars and unallocated bullion. All certificates are purchased through a reputable international Approved Dealer network and are transferable, non-negotiable, and have no fixed size.

The PMCP is especially suitable for investors seeking confidentiality, flexibility and low cost secure storage for their precious metal assets. As far as Australians are concerned, no sales tax is levied on purchases and sales of precious metals in Australia and there are no restrictions on the movement of precious metal in and out of Australia. Consult your own financial adviser with regard to taxes in your own country.

With regard to security. As per the Perth Mint, "All precious metal held by the Perth Mint Depository in both allocated or unallocated storage accounts is covered by a Western Australian Government Guarantee. The Perth Mint is wholly owned by the Government of Western Australia and has been providing investors with precious metal storage and trading facilities since 1899. Western Australia is rated AAA by Standard and Poor's. The bullion bar products of the Gold Corporation group enjoy accreditation from the London Bullion Market Association (LBMA), the New York Commodities Exchange (COMEX) and the Tokyo Commodities Exchange (TOCOM). And all precious metal owned or controlled by the group, including PMCP metal, is insured (at The Perth Mint's cost) by reputable international insurers."

The Perth Mint Certificate Program is the only Government Guaranteed precious metal accumulation program in the world. It is owned by the Gold Corporation, a unique diversified Australian precious metals group created by statute in 1987, and wholly owned by the Government of Western Australia.

Transaction confidentiality is provided for under the Gold Corporation Act 1987 and the Perth Mint Certificate Program's administrative procedures.

The following coins and bars are available under allocated storage:
Australian Nugget gold coins in eight sizes: 1 kilo, 10oz, 2oz, 1oz, 1/2oz, 1/4oz, 1/10oz, 1/20oz
Australian Lunar gold coins in seven sizes: 1 kilo, 10oz, 2oz, 1oz, 1/4oz, 1/10oz,1/20oz
Australian Kookaburra silver coins in four sizes: 1 kilo, 10oz, 2oz,1oz
Australian Lunar silver coins in five sizes: 1 kilo, 10oz, 2oz, 1oz, 1/2oz
Perth Mint gold bars in eight sizes: 50oz, Kilo, 20oz, 10oz, 5oz, 2.5oz, 1oz, 1/2oz
Perth Mint silver bars in five sizes: 100oz, 50oz, Kilo, 20oz, 10oz
AGR Matthey 400oz gold bar and 1,000oz silver bar

The Perth Mint Certificate can easily be liquidated if required. The owner simply sells the Certificate back to an Approved Dealer. Alternatively, the owner can take physical delivery at the Perth Mint or arrange for physical delivery at a variety of locations worldwide of their gold.

One can also surrender any portion of the Certificate, provided you continue to meet the account minimum. A new Certificate will be issued for the remainder of your precious metals.

In addition to the purchase of the precious metals and payment of fabrication charges, there is a USD $50.00 (AUD $10.00 for Australian/New Zealand residents) certificate fee regardless of the size of the certificate. The only other fee is the Approved Dealer's commission.

Lastly, if you lose or have stolen your certificate(s) a replacement is available by filing a Lost Certificate Declaration Form and paying a re-issuance fee.

The Perth Mint Certificate is made available to individual investors through an approved dealer much like the purchase of physical precious metals for delivery.

For those who want to own gold without the inconvenience of transport, storage, the security risks of having and owning gold on your property and the additional cost of insurance, a Gold Certificate Program from the Perth Mint is a useful alternative.

Should I Invest in Gold Funds?

If you are asking, should I invest in gold funds, then the first thing to understand is what gold funds are.

What are Gold Funds?
There are basically two types of gold funds. Mutual Funds and Exchange Traded Funds. Each have their own advantages and benefits. Each are quite different and may not suit everyone. In all matters of finance and investment always consult with your own personal finance advisor before embarking on any investment.

Mutual Funds
A mutual fund is a organized management group where a number of people pool their investment money and the managers of the fund invest those funds in various investment instruments such as stocks, bonds, short-term money market instruments, and/or other securities and by adroit management of those investments, attains a capital gains and collects the dividend or interest income. If the management is good the investment will realize a profit. If the investment is poor then the investment will record a loss.

The investor 'buys' units' at a set price and the profit/loss of the investment is reflected in the movement of the unit price. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.

In the US, this is legally known as an "open-end company" under the Investment Company Act of 1940 (the primary regulatory statute governing investment companies), a mutual fund is one of three basic types of investment companies available in the United States. Outside of the United States (with the exception of Canada, which follows the U.S. model), mutual fund is a generic term for various types of collective investment vehicle. In the United Kingdom and western Europe (including offshore jurisdictions), other forms of collective investment vehicle are prevalent, including unit trusts, open-ended investment companies and unitized insurance funds.

A good example of this type of fund is the BullionFund.com.

According to their web page:

"The world's first and only open-end mutual fund trust that invests exclusively in equal proportions of unencumbered, fully allocated gold, silver and platinum bullion."

"The Millennium BullionFund's investment objective is to provide a secure, convenient, low-cost, low-risk alternative for investors seeking the benefits of capital preservation, appreciation, portfolio diversification and hedging that only bullion ownership can offer."

"The Fund has a fixed investment policy of purchasing equal amounts of each metal, and does not employ derivatives, futures contracts, options or leasing. Since the Fund is priced daily at Net Asset Value, there are no premiums, discounts or liquidity constraints. In this way the Fund’s assets are not dependent on anyone’s promise, representation or ability to perform. The Fund’s assets are not someone else’s liability."

In Australia the term "mutual fund" is generally not used, instead the name "managed fund" is used. But this is more generic as the definition of a managed fund in Australia is any vehicle in which investors' money is managed by a third party (NB: usually an investment professional or organization).

Exchange Traded Funds
The other type of fund is the Exchange Traded Fund (ETF). This is quite different in a number of aspects.

The basic idea of a gold ETF was first officially thought of by a investment company, the "Benchmark Asset Management Company" in India. In 2002 they filed a proposal for the basic concept with the Securities and Exchange Board of India. They received regulatory approval for this some time later and the first gold exchange-traded fund actually launched was in March 2003 on the Australian Stock Exchange under Gold Bullion Securities (ticker symbol "GOLD").

Gold Bullion Securities (GBS) are fully backed by gold which is both deposited and insured. GBS was launched to give financial institutions and private investors the ability to own gold and gain exposure to the price, without the inconvenience of storing physical bars. So here an individual invests in gold, not in a pooled activity as in a mutual fund but as an individual. Whereas the mutual fund might invest in stocks, shares and bonds, the EFT investor is buying an amount of gold which is represented by an account .

After the launch of Bullion Securities on 28 March 2003 in Australia, a number of associated gold ETFs were launched on other stock exchanges. These gold ETFs are grouped under the name Exchange Traded Gold (ETG).

Examples of Gold Funds
Here are some examples of various funds by country in alphabetical order.

Australia
Exchange Traded Gold is listed under:
Gold Bullion Securities (ASX: GOLD)
Lyxor Gold Bullion Securities (LSE: GBS and Euronext: GBS)
Streettracks Gold Shares (NYSE: GLD)
New Gold Issuer (JSE: GLD)
Exchange Traded Gold is run in association with the World Gold Council, and as of January 2007 it held 560.49 tonnes of gold in storage.

USA
The iShares COMEX Gold Trust was launched by iShares on 21 January 2005 and is listed on the New York Stock Exchange (NYSE: IAU). As of January 2007 the fund held 44.45 tonnes of gold in storage.

Switzerland
The ZKB Gold ETF was launched on 15 March 2006 by Zürcher Kantonalbank and is listed in Switzerland (SWX). Shares are sold in 1 kg gold units, with a minimum purchase of one unit. As of January 2007, ZKB Gold ETF held 1.53 tonnes of gold in storage.

Canada
The Central Fund of Canada (TSX: CEF.A and NYSE: CEF) are a public corporation headquartered in Calgary, Alberta, Canada, mandated to keep the bulk of their net assets in a mixture of gold and silver with a small percentage of cash. The custodian of the gold and silver assets is the main Calgary branch of CIBC. As of January 2007, the Central Fund of Canada held 22.79 tonnes of gold and 990.59 tonnes of silver in storage.

United Kingdom
In September 2006 ETF Securities launched ETFS Gold (LSE: BULL), which tracks the DJ-AIG Gold Sub-Index. Unlike other GETFs, ETFS Gold is not backed by physical gold bullion.

Should I Invest in Gold Funds?
So when asking the question, should I invest in gold funds, the answer is yes. In terms of what to invest in? well, for those new or unacquainted with the financial and gold markets as well as those with little time to devote to long hours of analysis and trying to figure out the markets movements, the mutual fund, such as Bullion Fund listed above are probably the safest and easiest way to invest in precious metals.

Abbreviations:
ASX Australian Stock Exchange
EFT Exchange Traded Funds
SWX Switzerland Stock Exchange
GETF Gold Exchange Traded Funds
TSX Toronto Stock Exchange
CEF Central Fund of Canada
NYSE New York Stock Exchange
CEF.A Central Fund of Canada Limited
IAU Ishares Comex Gold Trust
GLD streetTRACKS Gold Trust
LSE London Stock Exchange
BULL ETFS Gold
JSE Jamaica Stock Exchange
Euronext European stock exchange
GBS Lyxor Gold Bullion Securities

Gold IRA

IRA is an acronym for Individual Retirement Account. An Individual Retirement Account (or IRA) is a retirement plan account or in real basic terms, investment accumulation for retirement and which provides some specific tax advantages for retirement savings in the United States. In some other countries, such as Australia for example, it is called superannuation.

An IRA can consist of various investments including stocks, shares, bonds, securities and other vehicles. Once an IRA could only be funded with cash or cash equivalents. Attempting to transfer any other type of asset into the IRA was a prohibited transaction and disqualified the fund from its beneficial tax treatment.

However, GoldMoney.com have recently introduced an IRA facility specifically for their US customers so they can now hold gold & silver in their Individual Retirement Account

James Turk, founder and chairman of GoldMoney explained: "We know that our customers like the ease with which they can purchase and hold gold and silver at low cost, which we then store for them in secure, allocated storage. Now our customers in the US can take advantage of these features in their IRA."

More information on this is available at: goldmoney.com.

Nowadays, gold bars and some coins with a purity of 24 karat (0.995+ fineness) are allowed into an IRA. They must be hallmarked by a NYMEX- or COMEX-approved refiner/assayer. So one can, these days have a Gold IRA where gold is used as the investment in the IRA including gold coins and bars

Bars such as the one ounce, ten ounce, one kilo (32.15 ounces), 100 ounces, and 400 ounces are allowed. But only gold coins having a purity of 24 karat (0.9999 fineness) are allowed in an IRA, with the exception of the 22 karat US Gold Eagle. Other gold coins allowed are some from Australia, Austria and Canada. But the South African Krugerrand is not permitted to be included in an IRA as it is a 22 karat bullion coin.

So why should one have a gold IRA?

An IRA is a long term investment. This makes it ideal for an investment as stable as gold. Where as currency is volatile and fluctuates due to influences outside of peoples control and stock and shares, bonds and even securities suffer from the same vagaries, gold has demonstrated itself to be stable over the past 200 years or so in terms of its purchasing power. While the purchasing power of currency has diminished steadily over the years one ounce of gold will still purchase the same value as it did 50 years ago. This drop in the value of currency is demonstrated by how much more is needed to buy an ounce of gold than was required many years ago.

This is shown by the following.

One ounce of gold from 2000 to 2005 rose from 280 dollars to over 530 dollars an ounce. The US Consumer Price Index during that same time showed the US dollar purchasing value went from $10 dollars to $8.82. Which means that in 2000 it only required $8.82 to purchase what then required $10 to make the same purchase in 2005.

So while the value of gold was increasing the value of the US dollar was going down. It makes sense therefore to have gold in one's IRA rather than currency as the gap between them widens on a yearly basis.

50 years ago the price of gold was 20 dollars an ounce. Now it is between 600 and 700 dollars an ounce. It now takes about 600-700 dollars to purchase what could have been bought for 20 dollars 50 years ago. Yet the quantity of gold remains the same. One ounce.

It seems evident therefore, that a Gold IRA is likely to ensure that there is a safe and secure comfortable future down the track provided one invests in gold.

Some useful links.
USA Gold
Austin Coins

Gold Markets

There are basically five major gold markets around the world. These are New York, London, Zürich, Hong Kong and Sydney.

It should be noted here that the London Bullion Market is sometimes confused with the London Metal Exchange which is quite different. Only gold is traded at the London Bullion Market while other metals, other than gold, are traded at the London Metal Exchange. So gold is considered as a metal by itself in these terms.

The price of gold is actually determined twice a day in London. Here a group of bankers get together and 'fix' the price of gold or in other words, decide what the price of gold is going to be at those particular moments when they decide the price. Of course the price then changes by the hour and moves up and down depending on various influences and perceptions of the value of gold. The reason for the fix is more to add stability and as a stable price twice a day for the banks to work on. A sort of guidepost for the day you might say. The price fix is actually determined in Pounds Stirling and is then converted, by various markets, into the currency of their country. Commonly, around the world, the price of gold is perceived in US dollars and Euros.

Each market have their own operating times depending on the time zones and this means that gold can be traded more or less around the clock. There is much trading between the markets as a result.

The value and price of gold varies depending on various factors. Some of these factors are, The value of various currencies, particularly the US dollar. The price of other commodities, The oil price, the economic situations and changes in those situations around the world. World events, such as wars and even dramatic weather influences, such as earthquakes, tidal waves etc.

The biggest influence of course is the perception of the value of gold as against their currency. There are hundreds of analysis on a daily basis busy writing on what they think the gold price is going to do, go up or down or remain steady. In the final analysis no one can predict with 100 percent certainty if the value of gold will go up or down. In the long term, one can see historically that gold has always gone up. Provided there is inflation, currency manipulation, economic upturns and downturns it would be safe to say that, in the long term, gold will continue the trend it has had over the past 100 years. It can be confusing to decide what to do, either buy gold or sell gold or just keep what one has.

Also you can ask the question, what sort of gold should one buy? Bullion in the form of coins or bars? Or buy into shares or gold producers or Exchange Traded Funds? Each have their advantages and disadvantages. Coins and bars are mainly for those keen to store up value and are really more for the long term storage or investment purposes.

Easier to move on a shorter term such as daily, or even on an hourly basis, are stocks in gold companies and such items as exchange traded funds where a bank might hold gold stocks and you buy and sell a slice of that gold which is represented by an account you have with that bank.

Buying and selling stocks in gold companies and gold producers is more volatile and done on the markets through share brokers or if you use a fund through fund managers.

Here is a list of the five main gold markets around the world.

New York ACCESS MARKET®
Market hours (local time)
2:00 PM - 8:00 AM Mon-Thu
7:00 PM - 8:00 AM Sun.

After-hours futures trading is conducted via the NYMEX ACCESS electronic trading system beginning at 2:00 PM on Mondays through Thursdays and concluding at 8:00 AM the following day. On Sunday, the electronic session begins at 7:00 PM. All times are New York time. Trading is in US Dollars

London
Market hours (local time)
8:30 AM - 4:00 PM, with Fixing at 10:30 AM and 3:00 PM.

As mentioned before, here the metal prices are fixed twice a day, known as London Fixes, these are the guidepost for the official gold trading around the world. Trading here is in British Pounds Stirling

Zurich
Market hours (local time)
8:00 AM - 5:00 PM.

The three biggest banks in Switzerland pool their gold for the purposes of this market. The Euro is the currency used here.

Hong Kong
Market hours (local time)
8:30 AM - 12:30 PM
2:30 PM - 5:30 PM.

Hong Kong is the center of gold trading for the Far East and the Southeastern Asia region. The Hong Kong Dollar is used here.

Sydney
Market hours (local time)
9:00 AM - 3:00 PM.

Australia's geographical location is ideally placed time zone wise to maintain the continuity of the spot gold market after New York traders go home and before the Asian traders wake up. Sydney opens up just after the NY market closes and is still open when the Hong Kong market opens. The Australian Dollar is traded here.

In addition the gold price is shown in US Dollars and Euros around the world in all markets.

Gold is, indeed, a very popular metal and the gold markets are very active places with many millions of dollars of gold being traded on a daily basis.

London Gold Prices

London gold prices are fixed twice a day at 1030am and 3pm London time. The London Gold Fixing is done by five members of the London Bullion Market Association. They sit down and discuss the price until they come to an agreement. This has, in the past, taken some time but these days it usually only takes a few minutes.

According to Wikipedia, the first fixing actually took place on 12 September 1919 among the five principal gold bullion traders and refiners of the day: N M Rothschild & Sons, Mocatta & Goldsmid, Pixley & Abell, Samuel Montagu & Co. and Sharps Wilkins. The gold price then was a princely four pounds 18 shillings and ninepence (GBP 4.9375) per troy ounce. Due to wartime emergencies and government controls, the London Gold Fixing was suspended between 1939 and 1954.

The gold fixing was then done twice daily at the City offices of N M Rothschild & Sons in St Swithin's Lane until May 2004 when it was taken place by the telephone. In 2004 N M Rothschild & Sons withdraw from gold trading and the London Gold Fixing and was replaced by the Barclays Bank.

A curious tradition of the London Gold Fixing was that participants would raise a small Union Jack on their desk to pause the proceedings. Under the telephone fixing system this changed and participants can now register a pause by saying the word "flag", and the chair ends the meeting with the phrase "There are no flags, and we're fixed".

The current five participants in the Fixing, who must be members of the London Bullion Market Association, are now all banks unsurprisingly. They are:

Scotia-Mocatta — successor to Mocatta & Goldsmid and part of Bank of Nova Scotia
Barclays Capital — Replaced N M Rothschild & Sons when they abdicated
Deutsche Bank — Owner of Sharps Pixley, itself the merger of Sharps Wilkins with Pixley & Abell
HSBC — Owner of Samuel Montagu & Co.
Société Générale — Replaced Johnson Matthey and CSFB as fifth seat

Now even though you will see a gold fix price in dollars it is actually done in British Pounds Sterling and Euros not dollars. The gold fix in euros is a new venture. Traditionally, the London gold fix has always been in Pounds Sterling.

Although the London gold fixing is done twice a day and a gold price established, this does not mean that the price of gold stays at that price until the next gold fix. This is not the case. The fix price is the price at the exact instant in time at which it is agreed but within seconds it will be trading at different prices again.

So why have a London gold fix at all? Basically the five members use this as benchmark to establish a market price fixed for that precise moment when they can balance their sales and purchase transactions including orders and commissions from their clients. It also serves as a guideline for other gold dealers internationally.

Because five banks now 'control' the London Gold Fixing, it could be said that the banks are controlling the price of gold. This would be incorrect. The London Gold Fixing has become more of an institution and tradition than anything else. The price of gold is controlled by peoples perceptions of the value of gold, world economic affairs, how much gold is being bought and sold and other external influences such as new discoveries, sudden large purchases etc.

The London Gold Fix or London gold quote, as it is sometimes called, simply acts as a guideline which, in fact, many around the world do not follow. If a new gold strike is discovered in the outback of Australia, or China decides to buy sa few more extra tones, that is likely to have a greater impact on the price of gold than any agreement 5 men in an office is going to make.

Historically it has not controlled the value of gold, which seems to retain its own value regardless of the many variables that can appear to affect it. There are daily rises and falls and even weekly or monthly rises and falls which many analysis enjoy discussing and making up charts for. But in the final analysis, gold has been rising steadily over the past 100 years against just about any currency you care to name and is likely to continue that trend.

People love gold. People love to own and keep gold. Gold is considered valuable. People will always consider owning gold a better option than paper currency. Paper currency is a tool these days used by governments and those that influence them to control economies. This cannot be done with gold, hence the dropping of the gold standard. A currency will change and can be the subject of manipulation, inflation and depression (sorry – recession).

Gold stands alone. Offer gold to someone and they will take it. You can buy exactly the same value with an ounce of gold now than you could 50 years ago. Not something that could be said about currency.

Regardless of the London Gold prices and the fixing of the gold price each day, gold will continue to be a favorite and considered valuable regardless of the times and economics of the day.