Goldbugs undeterred by price volatility

Goldbugs undeterred by price volatility
By Sophia Grene
Copyright The Financial Times Limited 2009
Published: April 12 2009 11:42 | Last updated: April 12 2009 11:42
http://www.ft.com/cms/s/0/1efe70fe-25f0-11de-be57-00144feabdc0.html


“Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owner a counterfeit pile of paper.”

Although Ayn Rand’s views may be an extreme version, there are enough goldbugs of varying degrees of intensity to have pushed both the price of gold and the tide of money flowing into gold investment products to notable highs.

“The most direct gold you can buy is coins or bars,” says Daniel Sacks, who manages Investec Asset Management’s Global Gold and Precious Metals fund. “Coin purchases are picking up a lot.”

Buying gold coins may be the most satisfying for investors anticipating the end of the world as we know it, since they are tangible and portable, but it is an expensive business.

First, there is a premium over the price of the gold, currently around 15 per cent, according to Mr Sacks, and then there is the cost of insurance and storage of the gold, unless you simply bury it in the woods behind your cabin.

For investors who want to buy gold but not have to deal with the practicalities of storage, asset managers have been very happy to provide options. The most straightforward, and in recent months extremely successful (in terms of asset gathering) is the exchange traded fund.

The first gold ETF was launched in Australia in 2002, according to Hector McNeill of ETF Securities. Gold Bullion Securities, a joint venture with the World Gold Council, was backed by physical gold, bars of bullion sitting in a vault.

Graham Tuckwell, who set it up, subsequently moved base to the UK, where he set up ETF Securities and a European sister for GBS.

However, because the fund allows for physical delivery of the gold if the investor is so inclined, it was not eligible for a number of tax and regulatory benefits in various European jurisdictions. In addition to this, ETF Securities saw only one third of the revenue from the fund, because it was a joint venture.

“So we created our own fund, ETFS Physical Gold,” says Mr McNeill. “It’s almost identical but has some slight differences.” Those differences are largely in its treatment by regulatory authorities, although its annual management charge at 0.39 per cent is one basis point lower.

Other asset managers around the world have been quick to spot an opportunity for asset gathering. In the US the SPDR Gold Shares ETF, launched in 2004, has been one of the fastest growing ETFs in a highly competitive field. In the Middle East, Dubai Gold Securities launched a sharia compliant vehicle, also backed by gold bullion.

Swiss asset manager Julius Baer has a nice gimmick to attract the more paranoid investors in its year-old gold ETF. “There is a webcam in the store. When you buy the ETF, you get an access code, so you can log on and see your gold,” says Stefan Angele, head of investment management at Julius Baer.

“People are very worried about the fiscal situation. They want to go back to the gold standard because they don’t trust central banks,” he suggests, referring to Switzerland’s recent decision to intervene in the market in an attempt to weaken the franc.

It is not obvious, however, that investors are thinking that clearly. “It’s about emotion,” says Mr Angele. Mr McNeill is more blunt: “People who trade gold are the most paranoiac on the planet.”

The emotion and the investment strategy can combine in odd ways, though. While the bulk of the money in gold ETFs seems to be going into physically backed funds, a number of investors prefer the futures based fund from ETF Securities, or the exchange traded note launched last month by Lyxor.

“We have around $130m in ETFS Gold, compared with $7bn in the three physical funds,” says Mr McNeill.

These vehicles invest in derivatives, supported by collateral invested in short-term fixed income instruments. They may offer exposure to the gold price, but they are also deeply involved in the financial system goldbugs are mostly attempting to avoid, as well as having extra charges to manage the collateral. The Lyxor ETN, for example, currently costs over 100 basis points, due to the high cost of collateral management.

“There are some investors who just like to track an index. I don’t know why,” says Mr McNeill. Other motivations are even more obscure, he says.

“We once had a guy turn up asking for a prospectus. He said he liked the ETFS Gold because it was under $10 a share and he liked stocks that were under $10.”

Investors less in thrall to the glister of gold may still be keen to invest, seeing it as a useful source of diversification, a hedge against inflation or simply a rising asset class. For them, a futures-based ETF might make sense. If they are prepared to put up with even more volatility than the gold price itself, they can allocate money to gold equity funds.

Mr Sacks describes his fund as offering “gearing on the price of gold”, which should lead to it outperforming in the good times and underperforming in the bad. Judging by last year’s performance, investors need to be prepared for a rocky ride. After losing more than 50 per cent in the first three quarters of the year, it bounced by 38 per cent in the final three months and is continuing to do well.

Another gold fund manager, Graham Birch of BlackRock, has taken a sabbatical after a rocky year in 2008 when the fund fell 17.4 per cent.

The fund remains popular, with Evy Hambro keeping Mr Birch’s seat warm for the rest of the year. Whatever their motivation for investing, it seems gold hunters will continue to ignore the volatility of gold, providing opportunities for asset managers, whether it be physically backed gold ETFs or complex derivative structures taking advantage of gold volatility.