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Thursday, October 14, 2010

Cashing in Gold ETFs

The cashing in of Gold ETFs has begun! A big time investor in London was recently prepared to pay the 750 pounds required to cash in his gold exchange traded funds and take delivery of his gold bullion.

This is the first transaction of this sort and likely will herald further such transactions as people scramble to get their hands on solid gold rather than rely on shares that reflect the movement of the gold futures market. Gold investors, it seems, are becoming more suspicious of global gold markets and would rather stick to solid gold that has an industrial use such as making jewelery, or as an investment strategy by holding gold that, although may not generate any interest, certainly does retain its value.

It is significant that the investor has been prepared to pay a premium to acquire his gold. The gold broker in question, ATS Bullion in London, sells gold at a four percent premium to any investor buying a kilo bar. At the time of this particular conversation, bars were selling for 29,000 pounds, making the commission for buying a bar 1,160 pounds. More than the 750 pounds flat fee from ETF Securities this particular investor paid, although there were additional costs such as shipping and insurance etc.

Townsend Lansing, a director at ETF Securities stated, ‘As far as I know, this is the first time it has gone ahead. Generally, when it has been requested in the past, they (the clients) start looking at the costs and the process doesn't look as cost-effective as they had originally thought. But this one actually went through. They had made their own cost analysis and then took the required step.’
Lansing also said that anyone considering using this facility should factor in the cost of holding a London Bullion Market Association (LBMA) account, which is the required recipient of the redeemed gold. He added, ‘There are additional costs in moving the investment-grade gold into an account and form that an investor can conveniently hold.’

Lansing also pointed out that most investors buy ETFs through brokers who then hold the shares on their behalf. This could cause initial problems for any investors hoping to turn their shares into gold as ETF Securities has to be able to identify which shares actually belong to the investor. Only when individual shares are matched up with the individual investor can the process of swapping them for gold go ahead.

It seems evident that, although, for a price, one can remove ones gold holdings from an EFT account under the right circumstances, companies such as ETF Securities are not fully comfortable with it. The real reality is that a run on extracting ones gold from a gold ETF would cause immense pressure on the gold ETF and if there was insufficient gold to dish out as has been speculated not too long ago the ETF would likely come crashing to the ground.

Despite this, or even because of it, it is possible this is not the last cashing in on gold ETFs that will occur given the current global financial crisis.



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