that would allow investors to redeem shares for physical gold,
currently sitting in the regulatory pipeline, promise to bring a
shares-for-gold convertibility similar to that found in the SPDR
Gold Shares (NYSEArca:GLD) to investors of any size. But it remains
to be seen just how cost-competitive these strategies will be.
Indeed, both the Market Vectors Redeemable Gold Trust and the
Merk Gold Trust aim to provide investors-any investors-an
opportunity to invest in securitized gold while being able to take
delivery of gold bullion in exchange for their shares.
GLD, by comparison-the market's biggest gold trust and
second-largest ETF in the world today-already offers that access to
gold, but limits that redeem-for-bullion feature to amounts of
100,000 shares or more-a restriction Merk and Van Eck's Market
Vectors are looking to remove. GLD's expense ratio is 0.40
The idea certainly has its allure, and is said to cater to
growing investor demand for access to physical gold at a time of an
improving, but still-uncertain, economic environment both here and
abroad. Gold has long been seen as the safe-haven asset of choice
for many investors who lack confidence in the economy or in
currencies in times of economic trouble.
Axel Merk himself, the mastermind behind the gold trust strategy
he first put in registration a year ago, has said before that he
wholeheartedly believes in the investor demand for such an ETF. If
GLD's $65 billion in assets under management are any indication,
the market's appetite for access to securitized physical gold
through an ETF is enormous, no doubt.
But while there's no questioning that the marketing hook is a
good one, it remains to be seen just how feasible-from a cost and
logistics perspective-the strategies Merk and now Market Vectors
propose will prove to be. Neither registration statement for either
fund has yet provided details on that cost structure, and neither
company can comment on filings.
"There are costs and hassles involved in withdrawing,
fabricating or buying, and then shipping smaller retail gold
products to a private investor," Adrian Ash, head of research for
Bullion Vault, told IndexUniverse, noting that these costs in
general can quickly escalate, even if he was not commenting
directly on either of the funds.
In fact, the costs to withdrawal small amounts of gold from a
vault in London can be as much as three times greater than the fee
charged for larger amounts, by some estimates-costs that could
prove to be prohibitive for smaller investors if they get passed
through in their entirety. At BullionVault, the fee for gold
withdrawal goes from 2.5 percent by value for whole 400 oz. bars to
7.5 percent for amounts below that level.
"That's perhaps prohibitive compared to the best current retail
dealer quotes, but we're intended as a cost-efficient store of
value, free from counterparty risk, and not as a route to putting
physical metal into your hand," Ash noted.
"As it is today, an individual wanting to switch from ETF
exposure to possessing physical bullion could simply sell their
stock, and then use the cash raised to arrange the purchase
directly themselves," he said. "That way they get to control all
Taking ownership of gold also implies several other costs such
as shipping fees-most likely from Europe-based or Asia-based vaults
to the U.S.-insurance and storage costs once investors have the
physical metal in hand.
Finally, there's the cost-or value-of liquidity. GLD, for
instance, trades on average some $2 billion a day, with a bid/ask
spread of about 1 ½ cents-practically a negligible cost. That
bid/ask spread is an implicit cost of owning the trust, outside of
the explicit expense ratio fee, which makes liquidity an important
factor in the cost structure of these ETFs.
As the filings currently stand, no details are known about how
Merk and Van Eck plan to make this complex cost structure
accessible to smaller shareholders, but at the end of the day, as
State Street's head of ETF Sales Strategy Kevin Quigg put it,
investors "will have to weigh all costs of ownership and make sure
they're consistent with their long-term goal."
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