Wealth Manager - the site for professional investment managers

Register to get unlimited access to all of Citywire’s Fund Manager database. Registration is free and only takes a minute.

ETF investor turns paper into gold bullion for the first time

A mystery investor has paid a £750 fee and turned shares in an exchange traded fund (ETF) into physical gold. The ETF - or exchange traded commodity (ETC) - called Gold Bullion Securities, has a built-in facility that allows investors to swap their shares for gold, but this has never been used before. 

The timing of the first transaction of this sort is likely to be related to the price of gold which has been hitting new highs on a daily basis. Investors who want to hold gold rather than shares in a gold ETF may be suspicious of global gold markets; have an industrial use for the metal like making jewellery; or have an investment strategy that requires holding physical gold.

Whatever the reason for buying gold an investor will pay a premium above the gold price to get their hands on it. Gold broker ATS Bullion in the Strand in London, said it would sell gold at a 4% premium to an investor buying a kilo bar. At the time of the conversation these bars were selling for £29,000 making the commission for buying a bar £1,160, more than the £750 flat fee from ETF Securities (although there are other costs).  

Now that the facility has been used it demonstrates the difference between traditional exchange traded products and holding metal-backed ETFs. Investors holding these shares have a choice of selling them for cash or converting them into real assets like gold.

The size of the transaction and the identity of the investor was not disclosed by ETF Securities who would only say that the transaction took place ‘recently’. 

Townsend Lansing, a director at ETF Securities, said: ‘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 client) 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 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 said: ‘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.  

ETF Securities offers the service in PHAU (gold) - recommended in Citywire Selection - as well as PHAG (silver), PHPT (platinum), PHPD (palladium), PHPM (basket of physical commodities) with a fee at £500 maximum per redemption of any size, while GBS (gold) has the same service at $750 per redemption of any size and its Australian gold product for AUS $1000.

Lansing would not comment on whether ETF Securities’ new physical ETFs for industrial metals would have a similar feature allowing investors to turn their shares into metals like aluminum, zinc and copper.

Debbie Fuhr, ETF analysts at BlackRock, the owner of iShares, the largest ETF provider, said that investors redeeming gold would be faced with storage costs and would have to have the gold re-tested for purity if they wanted to return it to the market. She said: ‘I don’t see the benefit. I can’t see why anyone would want to do it.”

In 2008 US investors used the futures markets to make similar redemptions. They bought gold and silver futures contracts and waited for the contracts to expire before picking up bullion from warehouses.   

The aim was to by-pass high broker charges and shortages of physical metal. Gold and silver backing the futures markets is kept in warehouses in the US while most of the gold backing ETFs is stored in vaults in London.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Citywire TV
Play JPM’s Negyal: Back divis to temper EM volatility

JPM’s Negyal: Back divis to temper EM volatility

Omar Negyal, co-manager of the JPMorgan Global Emerging Markets Income trust, says a dividend approach to emerging markets reduces the volatility of investing in the asset class.

Play WMR: Why Russia will lose this war

WMR: Why Russia will lose this war

Author and journalist Adam Lebor believes a perfect storm is brewing when it comes to the Russian economy. .

Play WMR: Gerard Lyons warns Asia is the real risk, not Russia & Ukraine

WMR: Gerard Lyons warns Asia is the real risk, not Russia & Ukraine

Chief economic adviser to London mayor Boris Johnson outlines the geo-political risks in Asia and explains why the risk of another eurozone crisis must not be underestimated.

Your Business: Cover Star Club

Profile: 'new normal' now is as dangerous as when it was applied to tech

Profile: 'new normal' now is as dangerous as when it was applied to tech

7IM's CIO Chris Darbyshire says he has been re-energised by his new role, but has little time for 'new normal' doom-mongers

Wealth Manager on Twitter