Gold investment choices on the rise
By: Tim Wood
Posted: 2003/05/05 Mon 17:03 EDT | © Mineweb 1997-2003
NEW YORK -- One popular excuse for weak gold prices is the lack of product and distribution. It is really a coded phrase meaning that the majority of Western investors would prefer to own gold in a non-physical form.
It is not difficult to buy gold if you desire it. You can buy gold coins by mail order in most places while dealers of one sort or another dot every major city in North America, Europe and Japan. Walk in, put your money down and take home your gold. If you’re a more substantial player, you can also buy futures contracts and take delivery of large lots.
For modern gold marketers the base of investors who like to buy physical gold in this way has been declining, so they have had to switch to alternatives which amount to a single thing whatever they are called – securitized gold. Whether it’s GoldMoney’s goldgrams, gold stocks, gold futures on Comex, precious metal mutual funds or the forty year old Central Fund of Canada [CEF], investors are buying paper that promises to represent gold in some way.
That sounds an awful lot like a fiat currency, doesn’t it?
It is, though antagonists will cry foul because gold is ûber money. Fair enough, but unless you hold the metal physically, anything else you have is a promissory note and little else. Possession is nine-tenths of the law, especially for hardcore gold bugs and even then president Roosevelt proved to have a trump card.
In modern investment management, paper or digital gold is a virtue which is why so many metal marketers are chasing the idea as they watch coin sales shrink thanks to the high commissions as well as insurance, handling and storage problems. If you want to do volume business in gold, you need to tap the general retail market and that group is firmly wedded to paper instruments of one sort or another; representations of either a perceived or actual value.
While the retail investment market is not being presented with new ways to buy gold, there is increasing choice which is the most important development because it drives down the final price to the consumer and will help make gold more competitive.
An unintended consequence is a lurking threat to gold producer equities. The rash of new funds all promise an absolute discipline where the amount of paper you own is fixed to a specific amount of metal. Not so gold equities where the oft mentioned value of investing indirectly in gold is subject to relentless dilution – simply examine the change in gold produced per share in issue from one year to the next to see this impact. It is hardly trivial.
New choices
The new flavour of gold investments is typified by the pending launch in Canada of the Central Gold-Trust by Central Gold Managers and Sprott Asset Management.
The Gold-Trust’s key distinction is as a closed-end fund. This provides greater tax and cost efficiency, primarily by avoiding the massive money flows at market tops and bottoms that force turnover and raise transaction costs with concomitant tax consequences that impact all unit holders irrespective of their passivity.
Gold-Trust is to be listed on the Toronto Stock Exchange and is being billed as “North America’s first gold bullion unit trust offering”. Overseeing the fund will be Eric Sprott, John Embry, Stefan Spicer and Philip Spicer, who is the founder and Chairman of CEF.
Gold-Trust is coming to market ahead of the World Gold Council’s much hyped but still absent global exchange traded gold fund. However, it was beaten to the punch by Australia’s confusing Gold Bullion Securities [GOLD]. The confusion arises because it is heavily promoted as a joint initiative with the WGC even though the latter’s role is limited to acknowledging that Gold Bullion Limited is a paid up member of the Council.
How this overlap and eventual competing interest will be resolved remains of interest.
Ultimately, Australian gold products are handicapped by the currency in which they are denominated, especially if the intention is to attract American investors who add butter and jam to the bread baked by everyone else. The Australian dollar has a similar function to gold as the inverse of the American dollar, which makes investing in Gold Bullion with US dollars a tricky proposition.
There is also the potential for confusion with the Perth Mint’s Gold Certificates that have attracted a lot of attention in America. Adding to the confusion is the Perth Mint’s determination to list its own listed gold security that “resembles a call warrant.” Meanwhile, Aussies can also dive into Westpac Bank’s gold participation deposits.
So far so good for Australians – provided the fees and complexity are reduced, the competition is real, and there is adequate gold experience and independence among the trustees.
Canadians are blessed with some more choice in the Millennium BullionFund which brags of being “Canada's first and only open-end Mutual Fund Trust that invests in real bars of Gold, Silver and Platinum and qualifies for RRSPs, RESPs, RRIFs and LIFs.”
All that said, it is tiny with a total net asset value of less than US$4 million and it is a misrepresentation to ignore that CEF is older and equally qualifies for retirement investments. Notably, BullionFund has not injected more competition since its management fees are huge, as are the potential commissions, even if you take the CEF’s sometime premium to net asset value into account.
For now though the market anxiously awaits the WGC’s ETF, not because it is a unique product, but to see whether or not it can change gold investing dynamics. So far, the total amount invested in all gold related proxy investments and the metal itself remains a smidgen relative to total investment flows.
The dark horse is one of the producers taking the initiative. Here, Goldcorp [GG] especially comes to mind. If it allowed investors to convert their shares into a special class of scrip representing the firm’s bullion holdings and vice versa, that could become quite a play with dual benefits for the company and gold itself. After all, Goldcorp has done a lot of heavy lifting in the gold market over the last year; some help from its investors would not go amiss.
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