Bright prospects for investors
By Kevin Morrison
Published: August 22 2003 12:12 | Last Updated: August 22 2003 12:12
news.ft.com
Investors should soon be able to buy gold without having to worry about insuring, storing, transporting or even looking at it.
The World Gold Council, which is funded by most of the world's largest gold miners, hopes to list Gold Bullion plc, a gold-backed listed derivative in London next month as one of many gold-backed investment products to be listed on key world stock exchanges over the next 18 months.
US investors may have to wait until at least the end of the year before they have a similar choice because the council's plans to list Equity Gold Trust, a gold-backed exchange traded fund, on the New York Stock Exchange have been slowed down by regulatory and legal issues.
The council, a non-profit organisation, is understood to be facing a claim from the Bank of New York that the bank owns the intellectual property rights to Equity Gold Trust. The bank carried out some work for the council on gold investment proposals, but relations broke down and the council switched to UBS.
US investors are able to buy gold-backed securities in Central Gold Trust, a Canadian closed-end trust, which listed last month in C$46m (£20.6m) initial public offering.
Philip Spicer, co-chairman of the trust, says there has been strong demand for units in Central Gold Trust, which may lead to a future public offering, which will not dilute existing investors.
He says he welcomes more gold-backed investments and isoptimistic about the gold price.
"Precious metal prices have only begun what will be a long term upward trajectory," he says. Gold prices were trading about $363 a troy ounce, a 26 per cent rise since the start of 2002.
One of the main reasons why the gold council chose an ETF for the US was its ability to be a low-cost tracker for an underlying asset. ETFs are particularly popular in the US, where they have grown considerably in the past three years as investors seek to lower their investment costs to offset lower rates of return.
The council will not give full details of its plans for listing in London. However, Gold Bullion is likely to be similar to a fixed-income product. The reason for different corporate structures for each of the council's proposed investment products are to address local tax, regulatory and legal issues.
Christopher Traulsen, senior analyst at Morningstar, the investment research group, says ETFs are attractive to investors because costs are well below the cheapest mutual fund.
The majority of ETFs are passively run and therefore do not have the big management fees required to pay fund managers to actively manage many equity and bond mutual funds. They can also be traded during the day, while mutual funds can only be traded at the end of the trading day.
"Fees have been a big issue during the bear market and I think investors are going to remain focused on investment costs," says Traulsen.
Gold Bullion and Equity Gold Trust are expected to have annual fees of about 0.5 per cent, putting them among the lowest cost investment funds.
This will include a monthly sales charge of about 0.2 per cent per annum as the fund will be required to sell gold to raise money to cover expenses.
This is an area of contention for Marketa Larsenova, an analyst at Morningstar, who wrote a report on the council's proposed US listing.
"The amount of gold held in the Equity Gold Trust, and therefore the amount of gold each and every share represents, will decrease over time," Larsenova said in a recent report.
"The trust anticipates gradually selling off its assets to cover its expenses and the trading price of a share is therefore expected to decline relative to the price of gold over time," she said.
Nevertheless this cost is expected to be cheaper than some of the alternatives for gold investment. Private investors currently face paying transaction fees of up to 7 per cent if they buy gold bullion.
Other options for buying gold include acquiring shares in mining companies such as Newmont Mining, Barrick Gold and Placer Dome in the US and Canada, or AngloGold and Gold Fields in South Africa. The value of gold shares are not only determined by gold price fluctuations, but management and financial issues.
Investors can also buy gold options or futures on the New York Mercantile Exchange or the Tokyo Commodity Exchange through most large brokers. Investors in options and futures could face margin calls to pay more funds if the price goes the wrong way.
Larsenova said there are tax issues US investors should consider before buying gold-backed ETFs. Gains from the sale of collectables, including gold bullion, held for more than one year are taxed at a maximum rate of 28 per cent, instead of the 15 per cent rate the new tax law assesses on long-term capital gains related to the sale of other assets, such as stocks and bonds. Gains on gold, stocks or bonds held for less than a year are taxed at the investor's ordinary income rate.
Tax implications have been a big consideration for the council, which is why it has been looking at incorporating Gold Bullion in Jersey because of its light corporate tax regime. The council is understood to be looking at similar jurisdictions in other parts of the world to list funds.
Investors have shown an appetite for gold-backed ETFs. The Melbourne-based Gold Bullion Limited has sold almost 130,000 ounces or about 4 tonnes of gold since listing the ETF on the Australian Stock Exchange at the end of March.
Gold analysts say although it only represents a fraction of global annual production of about 2,500 tonnes, it is an encouraging start.
Graham Tuckwell, chairman of Gold Bullion, says a a large proportion of sales have been to investors in Europe and the US, and have been made with no marketing budget. "There is a lot of appetite for this, we are getting calls all the time from people asking how can we get into this," Tuckwell says. |
