Chris & the WGC are talking about something for which I've begged(why didn't they listen 3 years ago?):
THOM CALANDRA'S STOCKWATCH
In pursuit of the golden grail
Some see exchange-traded bullion in our future
By Thom Calandra, CBS.MarketWatch.com
Last Update: 11:46 AM ET May 7, 2002
SAN FRANCISCO (CBS.MW) -- Where is the QQQ for gold?
Mining executives are probing demand for an electronic proxy for gold, in theory similar to the so-called Nasdaq 100 cubes (QQQ: news, chart, profile). With gold-mining shares at three-year highs in North America and other markets around the world, individual interest in the metal is rising.
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Small-lot traders on New York's Comex, the futures exchange, are net long more than 100 tonnes of gold for just the fifth time ever, says precious-metals analyst Andy Smith at Mitsui and Co. in London. Demand for gold in Japan, where bank depositors are losing some of their government insurance on cash holdings, is soaring. The deflated nation's gold imports have risen more than 600 percent from a year ago.
Another dramatic sign of gold's lure for ordinary investors comes in the form of a $110 million closed-end fund that holds gold and silver bars in Canadian vaults. Traded in Toronto and on New York's Amex, the security, Central Fund of Canada Ltd. (CEF: news, chart, profile), has, in two days, risen to a 23 percent premium to the net asset value of its holdings. The average premium for the fund, until gold prices surpassed $312 an ounce last week, was more like 6 percent.
"This is the only way to achieve a cash equivalent for gold in clients' accounts, quickly," says Eric S. Sprott of Sprott Asset Management in Toronto. Sprott, one of Canada's most active gold-fund managers, owns about $20 million worth of Central Fund shares on behalf of clients and participated in a private placement of the fund's shares in early April.
Trading in Central Fund had averaged about 20,000 shares a day before 1.4 million shares exchanged hands Monday. The closed-end fund's 23 percent premium is near or at an all-time high. See earlier report.
Chief Executive Stefan Spicer said he was taken by surprise by the ferocity of the move into the 19-year-old Central Fund, which he says is the only investment vehicle backed by physical gold and silver in the world. The fund holds 163,000 ounces of gold, 8.1 million ounces of silver and about $2 million of cash.
"Right now, there is a lack of a way to buy gold bullion," Spicer says, speaking from his office in Ontario. "Investors seem to want fast access to the metal in their accounts." Spicer says that in an extended gold rally, or a panicked rush to gold, he could envision the premium to own the metal rising sharply.
To be sure, there are other ways to own gold without schlepping off to buy gold bars or coins, then carting, insuring and storing the bullion. One or two countries have gold-backed bank deposits, says Mitsui's Smith.
Plus, there are so-called gold tracers in Germany and other markets, such as Luxembourg. These derivative devices are similar to warrants that track a commodity but settle in cash on certain, usually quarterly, dates. Mostly, they are for large investors who use the tracers to represent gold in institutional portfolios, without trading desks having to locate and store the metal.
In Germany, so-called Zertifikate are derivative products of the large banks -- Deutsche Banc, UBS, Commerzbank. The certificates trade much like securities. Still, they are not backed by a physical asset -- in this case, gold. "Most people buy the tracers directly over the quote systems of Deutsche, UBS, etc., with their German discount brokers, who are often connected to the quote systems of the major banks," says Josef Reinthaler, a money manager in Germany.
Via the Internet, www.goldmoney.com gives depositors electronic accounts and a secure payment system based on physical grams of gold deposited in an actual vault. The attraction, says Gold Money founder James Turk, is the avoidance of the baggage that comes with owning bulky gold bars and coins.
"It is easy for individuals to buy and store coins, but efficiently is another matter," says Turk, who's based in New Hampshire. "Though they worked well in the 19th century, coins are not efficient by modern-day standards. Fabrication and shipping costs can be expensive. Secure storage can be expensive, too. Safe-deposit boxes are not cheap."
Buyers of gold coins such as the U.S. Mint's American Eagle or Canada's Maple Leaf also pay sales tax in some states, and they face wide bid-and-ask spreads plus sales commissions.
The World Gold Council, a trade group for the metal, is fashioning a $200 million advertising campaign that will try to add to gold's lure as an investment. Gold jewelry, design and fabrication accounts for about 80 percent to 85 percent of the metal's demand, with the rest coming from investment.
The Gold Council this year is led by Gold Fields Ltd.'s (GOLD: news, chart, profile) chairman, Chris Thompson, who has pushed for easier ways to buy actual gold. The Sunday Times in Johannesburg just reported the Gold Council hopes to unveil a "securitised bullion instrument, tradeable through the regular channels, which will make it possible for investors to buy and hold physical gold."
Gold Fields, South Africa's second-largest producer, will list on the New York Stock Exchange later this week, joining neighbor Anglogold Ltd. (AU: news, chart, profile). South Africa, one of the world's five largest gold-producing nations, prohibits the ownership of gold as an investment.
All of the U.S. stock market's current exchange-traded funds are based on underlying indexes, such as the QQQ's Nasdaq 100 Index. Asset managers, if they can gain approvals from the U.S. Securities and Exchange Commission, would like to offer actively managed exchange-traded funds that trade as a real-time security and are subject to a money manager's many daily decisions.
Smith, the Mitsui analyst in London, says it might not be long before the world's big banks jump on the gold-instrument bandwagon. "Any bank worth its salt will design any investor who asks -- and often those who don't ask -- any gold-like instrument they wish," Smith said Tuesday. "If the gold is allocated, this involves dollar-for-dollar accumulation of physical gold."
Such a vehicle could boost physical demand for gold, unlike the speculative trading of gold for future delivery in futures-trading pits. In this country, mutual funds must obtain approvals to own actual gold in their portfolios. The process is a lengthy one, and few mutual funds own bullion.
Thompson, the Gold Fields executive who is headed to New York for his company's NYSE listing, is quoted on news service The Bullion Desk with some of the potential specifics of a possible exchange-traded fund for gold. "Most portfolios, equity managers' portfolios, are, by mandate, not allowed to own gold," Thompson said in the interview. "Most of the mandates around the world dictate you can own equities, bonds, tradeable instruments, but physical bullion you can't own -- so that a huge part of the investment universe is actually denied the opportunity to do so. We need to make it possible for them to own gold."
John C. Doody, editor of Gold Stock Analyst newsletter, says time will tell whether individuals are interested in an asset-backed gold security. Doody, whose top 10 gold-company stocks are up a combined 80 percent since Jan. 2, says there probably is a lack of interest in such a security, even with a gold rally that has lifted mining equities an average of 55 percent this year.
"The market capitalization of the 45 stocks we cover is $57 billion. Where's the industry's rank among the S&P 500 stocks?" Doody asks. "Way down the list."
Gold mining shares, as measured by the AMEX Gold Bugs Index (HUI: news, chart, profile), were up 1.7 percent at midday Tuesday. Spot gold's price was up 80 cents to $312 an ounce.
Thom Calandra's StockWatch appears each trading day.
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