22 June 2010

Why has the WGC bought into BullionVault?

On Monday the World Gold Council (WGC) announced that it and Augmentum Capital had completed a £12.5 million funding round in BullionVault in exchange for an equity interest.

It is an interesting development in their strategy. Until 2002, the WGC strategy was to support those selling gold. The 12 August 2002 announcement by WGC of the appointment of James E Burton (ex-CEO of California Public Employees Retirement System) as their new CEO foreshadowed two important changes:

1. a realisation that investment demand, rather than jewellery, was more capable of driving the price higher; and
2. a shift from supporting the industry to sell gold to developing its own "products" and competing against them.

Perth Mint got first hand experience of this new strategy when it was developing its ASX listed gold product in late 2002/early 2003. At the same time a Mr Tuckwell was developing what would become the first gold ETF in the world. The WGC decided to "take sides" and chose to endorse the Tuckwell product. Needless to say, we weren't too impressed. They then went on to develop and sponsor many other gold EFTs, the US listed GLD being the biggest.

However, I will concede that considering the cost and work involved in launching an ETF, especially on overseas exchanges, it may have been excusable for the WGC to get involved in developing such products since no one else was willing to (Perth Mint and Tuckwell excepted).

But, given the huge success of the various WGC sponsored ETFs, is it really necessary for the WGC to further compete against others in the industry? After all, the WGC ETFs hold 48 million ounces compared to BullionVault's 635,000. Does online gold trading have the potential to match the ETFs for impact on the gold price? I doubt it, so what is the WGC's motivation to extend beyond ETFs?

The Telegraph reports Marcus Grubb, managing director of investment at the WGC, as saying taking the BullionVault stake was part of the Council's strategy of "increasing its portfolio of successful platforms for gold investment". Does increasing its portfolio mean WGC will next buy a refinery to make WGC bars, or open WGC coin shops?

Is it a simple case of management empire building, or has WGC management been told to expand its portfolio with the objective of becoming self funding, or are gold miners (the WGC's members) using WGC as a front to move down the gold value chain without being seen by their shareholders as getting involved in non-core businesses?

I note with interest that IAMGOLD Corporation, a shareholder in James Turk's GoldMoney (one of BullionVault's biggest competitors), is also a WGC member. Note that Durban Roodepoort Deep (not a member of WGC) is also a shareholder in GoldMoney. It will be interesting to see if IAMGOLD pulls out of the WGC as a result of their support for GoldMoney's competitor. It would result in a WGC miners versus non-WGC miners fight in the online gold market.

1 comment:

Troy Ounce said...

The WGC doos this because they can. It has to do with greed, the sign of the time. And if nobody complains, why not? That's another problem: complacency. We rather go after the buck instead of sticking out our neck when something is apparently wrong. Conflict of interest? Do we care? Rating agencies get better fees if the rating is higher, Wall Street, Wall Street "donates" every year 4,5 B US$ to US Congress members; 44% of them are Millionaires. We are not leaving a better world for our children.