New Gold Fund

by | Oct 4, 2009 | Multi Currency Investing

A new form of gold certificate has evolved.

Recent messages looked at why holding some gold as insurance is important… but reviewed the downside as well. Review our most recent article on gold here.

In summary… physical gold is safest… if correctly stored… but expensive to keep… due to loss of income and storage… plus fabrication and dealing costs.

Investing in gold can also be a speculation and one way to own gold is through gold mutual funds.

Gold funds, that track the price of gold, are more efficient and less expensive than owning the physical but, some safety is lost as they are subject to the integrity of the establishment.

Gold funds that use futures contracts are especially at risk because the contracts are backed by the capital of the counterparties… not gold.

This creates a dilemma because lack of faith in the integrity of the establishment is exactly why many investors hold extra gold.

The best alternative to physical gold are gold funds that just own gold.  There are some gold funds that especially make sense for those who lack faith in the US establishment because these funds store their gold outside the US.

A new gold fund that stores its gold in Switzerland was recently introduced.

A Wall Street Journal article entitled “Now that’s security: Vaults managed by Morgan Chase” details one of these funds. Here is an excerpt from that article:

The ETFS Physical Swiss Gold Shares will start trading on the New York Stock Exchange’s Arca platform on Wednesday. It will be the third gold-backed ETF in the U.S. The fund will track spot gold prices by backing each share issued with one-tenth of an ounce of physical bullion stored in Switzerland.

Some other gold ETFs use futures contracts, in which there could be counterparty risk if someone fails to honor the contract.

Globally, gold ETF holdings have surged 42%, or 16 million ounces, since the beginning of 2009, according to UBS. The ETFs now hold a total of 54.23 million ounces of gold, close to last year’s total world production.

Partly due to the increase in ETF demand, gold prices hit a six-month high Tuesday and settled at $997.90 a troy ounce, up $3, or 0.3%, on the Comex division of the New York Mercantile Exchange. It hit $1,006.90 during the trading session, exceeding gold’s record close of $1,003.20 hit in March 2008.

The interest toward physical-commodity ETFs also reflects increased scrutiny by commodity regulators in the U.S. of the heavily leveraged ETFs that hold commodity futures. Regulators worry that excessive speculation might distort commodity prices. ETFs that hold actual gold and silver bars aren’t part of this debate.

The new product marks the latest charge into the U.S. market by ETF Securities, the London commodity ETF provider. In July, the company launched a silver-backed ETF and quickly increased its assets to more than $130 million.

However, it will face competition in the U.S. gold market, which is dominated by the $34.7 billion SPDR Gold Shares, sponsored by the World Gold Council, along with iShares Comex Gold Trust, a $2.4 billion fund that BlackRock recently acquired as part of its Barclays Global Investors deal.

The new fund offers a slightly lower expense ratio of 0.39% than its U.S. rivals, both running at 0.4%.

The fund is designed to cater to gold buyers who want to guard against extreme situations. The British company will hold its gold in Switzerland, which is “probably one of the most independent countries in terms of political influence,” said William Rhind, head of sales and marketing for ETFS Marketing, the marketing arm for ETF Securities.

The vast majority of gold is stored in London and the U.S. SPDR Gold Shares, the world’s largest gold fund, has all its bars stored with HSBC Holdings in London. The new fund will store its metals in Zurich in vaults managed by J.P. Morgan Chase.

This is a British company storing its gold in Switzerland… safer than a US gold fund using contracts or holding funds in the US... but still traded on a US exchange.

Each investors has to decide the risk versus balance that suits them.  This fund is a half way house… very convenient and with some safeguards (English base and Swiss storage) built in, but still not as safe for well stored, physical gold.


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Read the entire article  Now that’s security: Vaults managed by Morgan Chase