07 October 2008

Premiums & GLD

I found this comment to this SilverAxis blog of interest:

Is CEF’s “sizable” premium (9% at the moment), really all that high for a verifiable vaulted proxy for real metal (assuming it is), when there is a 45% premium on Silver Eagles and a 14% premium on a 100 oz bars deliverable from Tulving?

The premium on the Central Fund of Canada is interesting compared to GLD, which consistently seems to get questions about whether it really has the gold behind each share. GLD does not trade with such a premium, and sure its open ended nature ensures it closely matches the spot wholesale price, but are not the premiums on CEF and retail physical indicators of the market's assessment of the "safety" of such ways of holding gold relative to other methods like GLD? Of course the market is a voting machine, not a weighing machine so the premium may just indicate mood rather than real risk.

While not having anything more to rely on but GLD's assurances that it has the gold, personally, I consider that since it was created and sponsored by the World Gold Council, which is owned by gold miners (who want the price to go up), that they would not be involved in an ETF that wasn't talking physical off the market (which is ultimately the best way to make the price go up).


  1. If GLD equals GOLD.AX, then usually it trades at around a 2% discount to spot. I recently became an ex-holder of GOLD.AX I had been gradually scaling out and 'solidifying' the investment with physical gold, mainly due to question marks about HSBC, who vault the gold in London. HSBC has a very large American presence and exposure - enough said. Then I heard about issues with many ETF/ETC holdings in the London market, caused by credit defaults swap problems. While HSBC was not involved, it was one too many pieces of bad news, so I pulled up stumps for the remainder of my holdings. My main concern was from a liquidity angle, should the fund become a victim of some sort of credit squeeze playing out somewhere else within HSBC.
    I may be totally wrong about GOLD.AX, but I am getting risk averse these days, and if something happened, it would fail to meet my liquidity requirements.

  2. Hi!
    You seem to know a fair bit about GOLD and the Law. I have been eagerly awaiting you blog on the potential future confiscation of GOLD in Australia.

    I have a question for you, can one legally take out physical GOLD from Australia and if so, is there a limit?
    Your response would be highly appreciated.

  3. By GLD I was talking about the US ETF. Note that this is just one of a family of gold ETF put out by the WGC - http://exchangetradedgold.com/

    There are actually only four legally distinct WGC ETFs, but 12 listed ETFs due to dual listing arrangements. As you would expect, legally they are all slightly different due to different listing rules in the four "home" countries, but share I believe common vaulting with HSBC.

    The metal backing them should be in allocated form and thus off the balance sheet of HSBC, but who wants to be sitting around waiting for liquidators to work out what can and cannot be put in the creditors pool.

    There is also the question of liquidity (or pricing) of the ETFs on the stock market. I was speaking to a GOLD.AX holder at a lunch last week who complained of very wide spreads. Depending on the stock market, ETFs may or may not have a requirement for the issuer to make a market in their product (I don't believe such a requirement exists on the ASX). If there is no such requirement, then one is at the mercy of arbitrage working to ensure a reasonable bid/ask spread (for volume).

    Whether arbitrage will work depends on how easy it is for gold market traders to have gold exhanged for ETF shares or redeemed ETF shares for gold.

    As an aside, the Perth Mint's gold product on the ASX (code ZAUWBA), being a warrant (non-leveraged one) has a requirement to make a market.

    I think it has been observed in the past that the US ETF has been closely tracking the spot price, but it would be interesting to study, after this credit crisis, whether the 12 ETFs' liquidity/pricing spread held up well during these volatile times.

  4. Yes, that confiscation article has been sitting there nagging me, I got sidetracked by this credit crisis. I should get on to it as it may become very relevant before too long!

    No restrictions on import/export of gold. Note that Australia does apply a goods and services tax (GST) on importation or sale of gold in Australia that does not meet certain requirements - greater than 99.5% purity, internationally traded, recognised hallmark to simplify the law (see http://www.customs.gov.au/site/page.cfm?u=5350 for an indication)

    Note this means that 22ct coins, eg sovereigns, would be taxed on importation. If going out of Australia, you should check the law in the country you want to bring gold into. In some cases coins are not taxed or lower taxed than bars. Coins may also have the advantage in some countries that you can declare them as legal tender (at their face value, which is lower than their gold value) instead of declaring them as gold at their current market price.