19 December 2008

Warning on the existing Au and new Ag, Pt & Pd ASX listed ETFs

ETF securities, the issuer of the existing GOLD product on ASX, will shortly issue three more ETFs for silver, platinum and palladium. The prospectus (which also covers the existing GOLD product) has some alarming "features" I thought needed highlighting, and not just because GOLD is a competitor to the Perth Mint's gold warrant, ZAUWBA.

These are the facts, make up your own mind as to whether you consider these products suitable for long term holding or just short term speculating.

1.9 Transaction Documents. The documents which, in addition to this Prospectus, set out the terms and conditions relating to the Metal Securities and the holding of the Bullion comprise: The Constitution of the Company; The Trust Deed; The Custodian Agreements; The Service Agreement; and The Metal Sale Counterparty Agreement.

Comment: as with the US ETFs, you have a lot of counterparties involved that can in the case of a problem, all blame each other. You have to also read all these documents to fully understand the structure and therefore the risks involved.

2.2 Metal Entitlement. The ETFS Physical Gold securities (previously called Gold Bullion Securities) started in early 2003 with an initial Metal Entitlement of 0.10 fine troy ounces. The entitlement currently declines each day at a rate of 40 basis points per annum and will be 0.098118356 fine troy ounces as at 1 January 2009.

Comment: this is how all the ETFs work, except the Mint's warrant. Not so much a risk as an annoying aspect you have to keep in mind when looking at the ETFs price on the ASX and then divide by that (monthly) changing entitlement to work out the actual price per ounce your paying or receiving.

2.2.1 Management Fee. The fee is 0.39% for gold and 0.49% for silver.

Comment: the ZAUWBA product's management fee is 0.15%, why pay more?

2.4.3 Redemptions. A Holder may elect payment on Redemption to be in metal (the Metal Delivery Method) or cash (the Metal Sale Method) but may only elect the former if they have an unallocated metal account with a bullion dealer in London, who is a member of the LBMA or LPPM, to which such metal is to be transferred.

Comment: I don't know about you, but I don't have a London metals account and good luck trying to get one as an individual. Even if you can, you only get metal in London. This effectively means you can't redeem this product for physical. You can redeem ZAUWBA for any Perth Mint coin or bar, in Australia.

3.1 Where is the Metal? All gold and silver will be held by the Custodian at its London vault premises. ... The Custodian will be responsible for the transportation, handling and any costs associated with moving Bullion to or from its London vault premises and between any vaults of sub-custodians. As at the date of this Prospectus the Sub-Custodians directly appointed by the Custodian are the Bank of England, The Bank of Nova Scotia (ScotiaMocatta), Deutsche Bank AG, JPMorgan Chase Bank, N.A., UBS AG, Barclays Bank PLC, Johnson Matthey plc, Brink's Global Services Inc. and ViaMat International.

Comment: That's a lot of people holding your gold and silver, providing lots of finger pointing opportunities if things go bad.

3.2 Storage and Insurance of Metal. The Custodian (or one of its affiliates) may make such insurance arrangements from time to time in connection with its custodial obligations with respect to Bullion held in allocated form as it considers appropriate. The Custodian has no obligation to insure such Bullion against loss, theft or damage and the Issuer does not intend to insure against such risks. In addition, the Trustee is not responsible for ensuring that adequate insurance arrangements have been made, or for insuring the Bullion held in the Metal Accounts, and shall not be required to make any enquiry regarding such matters.


5.5 Custody and Insurance. Accordingly, there is a risk that some or all of the Bullion could be lost, stolen or damaged and the Issuer would not be able to satisfy its obligations in respect of the Metal Securities.

Comment: I find this an incredible statement. The custodian does not have to insure it, we don't intend to insure it and the trustee is not responsible for ensuring it is insured. What sort of custodianship is this? What a great business - give me your gold and if it gets stolen, that's your problem, just trust me I'm doing a good job.

5.6 Early Redemption of Metal Securities. The Company may, at any time, upon not less than 30 days’ notice by an announcement through the CAP to the Holders, redeem all Metal Securities of a particular type.

Comment: Now I don't think anyone would expect that an issuer of a product must be duty bound to continue to offer the product or service forever and ever. But 30 days, that's not much time for the investor to get out in an orderly manner. You may be forced to take a capital profit or loss when it does not suit you. Note also you must take cash, unless you have a London metal account.

Compare that to the "escape" clause that the Perth Mint put into ZAUWBA, which can only come into effect if we hold less than 100,000oz in the warrant and we have to give 6 month's notice (clause 12.1(e)). At least you have some time to arrange physical collection or sell at a price advantageous to you. Why couldn't ETF Securities offer the same sort of breathing space.


  1. 'Advertorial I wonder. Should the government employ such underhand, misleading propaganda?'

    Well this looks very much like a well informed perth mint employee to me scaremongering badly. Words like 'alarming' and 'warning'. It seems the WA govt mint doesnt like a bit of healthy competition. Should civil servants be attacking free enterprise in such an underhand and misleading fashion. I don't think so!

    What is the real differentiator for me between these products and those issued by the perth mint are as follows:

    - ETF Securities physical backed products are just that. Backed 100% by allocated bullion owned by the trustee on behalf of the holders. see what it says about allocated here http://www.lbma.org.uk/london/accounts

    - perth mint ZAUWBAa certificate guaranteed by the WA government and is not gold!! yes you can request metal but it has to be bought first or found from whatever is available

    - Whose CDS are better WA government or McDonalds. Well I'll let you guess

    Simple for me. The ZAUWBA is an unsecured debt issued by the Perth Mint on behalf of the WA govt. Its only good if they can pay you back! In todays environment of credit risk, counterparty risk etc. why would you want WA govt credit exposure in preference to a product backed 100% backed by allocated bullion. ETFS publish a bar list ever day here! http://www.etfsecurities.com/msl/bar_list.xlsy

    Simple for me. If ETF Secs, the custodian or anyone else goes bust you have gold bars 100%. If WA govt goes bust you have thin air! You choose!

  2. Hi Anonymous,

    The Government isn't employing any underhand misleading propaganda. If you check the About post, this is my personal blog and last I checked this is a free country and I can say what I want. I did this off my own bat, didn't check with anyone else in the Mint, and this post is not authorised or endorsed by the Mint at all.

    I personally think ZAUWBA is better than GOLD for long term holding, or aren't I allowed to state that opinion?

    Of course ETF Securities are physical backed. The key point is that the physical is not insured. Maybe you're a bit sensitive about having that fact brought out into the daylight?

    As to your statement that the ZAUWBA's are not gold, what hypocrisy considering it is a misleading statement. All the unallocated metal obligations of the Mint, including ZAUWBA are backed by metal used in the Mint's operations as stated on their website. It does not have to bought first or found. Are you prepared to make that same statement in public and not hide behind "anonymous"? At least I'm public in what I say.

  3. The fact is that Perth Mint DO NOT back the certificate 100% and teh guarantee is an unsecured credit against the WA govt. Therefore if the WA goes bust and the Perth Mint does not have enough gold for you then say goodbye to your money!

    As far as I am concerned I buy gold as a safe haven asset. If i wanted to buy unsecured credit to the WA govt I would buy bonds with a decent yield. Therefore invetsors should realise that when they buy this certificate they buy just that and NOT GOLD!

    In terms of insurance as an investor in the ETFs I have asked this question. The custodian in fact has a general insurance that covers the bullion.

    I think it iw also worthwhile stating that HSBC vault is the largest LBMA vault and arguably the most secure in the world.

    Perhaps as a perth mint and govt employee you should ask your investors to read http://silverstockreport.com/2008/perth7.html (Perth Mint fraud)

    If you want to discuss one on one email me.

  4. just wondering, when will perth mint issue silver/pt/pd on asx. We're kinda stuck with ETF Securities buying if we want exposure and I prefer Perth Mint issues since they're in Australia

    I don't think this scare about both
    ETF securities and Perth Mint ETF are warranted. Both are secure enough. ETF securities metals are in allocated form, not unallocated. ZAUWBA are indeed in unallocated form and WA government is not about to go backrupt. Western Australia is a resource rich state

  5. Just for your info ETF Securities is owned and founded by an Aussie from Melbourne Graham Tuckwell. These products are a great unknown aussie global success story.

  6. "The fact is that Perth Mint DO NOT back the certificate 100%"

    On this page http://www.perthmint.com.au/investment_invest_in_gold_storage_options.aspx the Mint says "Accordingly every unallocated ounce is 100% backed." Do you have any facts to back up your statement?

    You seem fixed on the idea that the Mint doesn't have the gold. Have a look at this post http://goldchat.blogspot.com/2008/12/mint-has-no-gold-again.html and this Kitco discussion https://www.kitcomm.com/showthread.php?t=29595 where I discuss how the idea that the Mint would not cover its liabilities as unlikely.

    I suspect that HSBC would have some sort of insurance, but my question is then why did they not just say this in the prospectus? I know you can't get coverage for $20 billion worth but they must at least have a first loss policy for say $500m, so why can't the prospectus just say that? Considering that issuers are liable for what the prospectus says I therefore find it interesting that it is so explict about no insurance and no responsibility for insurance.

    I am well acquainted with Jason Hommel - see http://goldchat.blogspot.com/2008/09/jason-hommel-has-made-some-comments-to.html. If you respect his opinion, I suggest you ask him what he thinks of ETF Securities.

    I can't see your email address, but in any case I'd rather have these discussion out in the open. I don't expect that you will change my mind, or me yours, but at least the discussion will help readers make and informed discussion. Anyway, there are only by my calculation about 100-200 unique readers of this blog so I wouldn't worry about any of this making much difference.

    I know Graham Tuckwell and it is a great Aussie success story, but this won't stop me from highlighting what I think are deficiencies in his product. I'm not going to blindly support something just because it is Australian.

    It is worth noting that GOLD has 4 to 5 times as much metal as ZAUWBA (check out company annoucements on the ASX for company GCB, the quarterly report says ZAUWBA has 68,000oz), so if anything the Mint is the underdog in this situation.

    Dark - the Mint has no plans to issue a silver/plat/pall ASX listed product, but you can always just open a Depository account as an alternative, but admittedly trading on the ASX is much easier.

  7. I recall significant concerns being raised about ETFS/ETCs by the UK press a few months ago. Although HSBC was not involved at that time, it demonstrated to me the kind of risks involved with these holdings. As I can easily securely store my own holdings, I decided to 'solidify' my assets, and sell my GOLD.AX holdings, as the risks were becoming increasingly worrying. Now I don't worry, and I know exactly where my metal is. Another emergent risk is the threat of capital controls. Even if the ETFs were closed, your gold might still be safe on the other side of the world (and still belong to you), but you may never be allowed to ship it to where you are domiciled.

  8. http://www.investegate.co.uk/invarticle.aspx?id=58393

    I came across this interesting article. ETF products plummet due to AIG

    ETFS Precious Metals dropped 50.68.

    Those of us buy into ETF expect the price to track the metal 100%. If theres a risk of the price falling to zero due to third party, thats not a good thing

  9. Regarding that Investegate article, I did see that AIG related problem when it first happened, but it refers to specific ETF Securities products, not all of them.

    To be fair to GOLD, it would not be affected by such an event due to its physical backing and I don't believe GOLD's price on the ASX fell by 50% at the time.

  10. asx gold didn't fall because it wasn't owned by etf securities at the time i think, it was owned by gold bullion securities

  11. Bron,

    Any idea why ZAUWBA is currently suspended from trading on ASX?


  12. ETF Securities did have ETCs tracking futures as well as allocated bullion backed products. These futures trackers were backed by AIG as a gtee. When AIG were rescued the products had a collateral layer added to mitigate credit concerns. This had no impact on any of the 7 allocated bullion products that ETF Securities issued. As Bron quite rightly pointed out.

    I can understand anonymous concerns and reaction but GOLD was totally unaffected and this had nothing to do with who owned it as the metal is the property of the trustee not the issuer and certainly not the holding company.

  13. Andy,

    ZAUWBA is not suspended from trading, it is in a deferred trading period so the management fee of .15% can be calculated and deducted. During this time it trades under the code ZAUDBA.

    If you go to www.asx.com.au and company annoucements, type in company code GCB (ie Gold Corporation's code) you will see the announcement earlier this month about it.

  14. http://www.marketskeptics.com/2009/02/warning-about-perth-mint-gold.html
    I'm wondering if you could address this issue here. Perth Mint suggests all unallocated are 100% backed, but this website suggest only 5% is backed

  15. Thanks for drawing my attention to that article. It is a bit of a rehash of a flawed analysis done by James Turk (competitor of the Mint with his GoldMoney) on our annual report.

    Actually, some of the comments do a fair job of refuting the article, but I'll address the 5% backed issues below and will republish on that site as well.

    First statement is that in our 2002 annual report (wow, that is current) "$96.2 million of gold on hand against $234 million of liabilities". Now this statement assumes that the $96.2 and $234 are all gold. Well, unlike the analyst who wrote this, lets look to the notes to the accounts.

    Note 8 says clearly that of the $96.2, only $88.2 was precious metals, the rest being normal inventory items (eg like packaging). Not a major mistake but shows how much work was put into this analysis.

    But why is this analysis only looking at one item in the current assets but comparing it to the total current liabilities? If one looks at the other big current assets of $134.9 and then to note 7 one finds that $133.2 of it is a precious metal loan to a related entity AGR Matthey, which at that time the Mint had 50% ownership. This "receiable" represents physical metal used in AGR Matthey's operations. So it is a bit unfair to not include this in the precious metal assets backing the Depository client liabilities.

    The Mint on its website is very clear that unallocated metal is used/backed by metal in its operations and those of AGR Matthey.

    If we look at the liabilities, we see that it is composed of things like Provisions, which are clearly not gold denominated liabilities. Anyway, looking at the two major components of $111.8 and $110.6 and again to the notes it says that these are precious metal borrowings. But the $111.8 is interest bearing and the $110.6 does not attract interest. Now Depository has never paid interest on it unallocated liabilities, so we can conclude that the $110.6 must represent the unallocated "borrowed" from Depository clients. What is the $111.8? It is actual metal borrowed from bullion banks, and they aren't going to do so for nothing, hence that attracts interest charges.

    This means that in 2002, the Mint had $88.2 + $133.2 in precious metal assets against $110.6 in Depository client liabilities. No problem here, fully covered. The excess assets of $110.8 being funded by borrowings of $111.8 by bullion banks.

    Now this balance sheet and notes to the accounts type analysis is not obvious to non-precious metal people. We recognised that it was not clear so we added an additional note to the accounts to make it clear. Interestingly, this note was in the 2006 accounts that the article refers to and calculates as a 5.5% "coverage".

    Again, if they had bothered to look at the notes to the accounts, on page 78, note 23(d) you will find a table that very clearly states:

    "The $886 million of precious metals deposited by Perth Mint Depository clients (note 16) was used in
    operations by Gold Corporation as inventory ($507 million - Note 7b) with the balance in the refining
    operations of AGR Matthey (Note 7a)."

    I should note that the amount under Note 7a is $590 million. Again, $886m backed by $507m at the Mint and $590 at AGR Matthey. I don't see where one gets 5.5% backing from, looks more like 123%.

  16. Bron - I may be missing something here as I haven't looked at the financial statements, but I don't understand how your analysis of the coverage % provides much comfort.

    Your commment:
    "This means that in 2002, the Mint had $88.2 + $133.2 in precious metal assets against $110.6 in Depository client liabilities. No problem here, fully covered. The excess assets of $110.8 being funded by borrowings of $111.8 by bullion banks."

    Is there a typo above - did you mean $111.8 FROM bullion banks?

    Anyway, PM has $88m metal on hand, $133m metal loaned to AGR, $110m depositary client liability and $112m metal borrowed from banks.

    First, I would discount the loan to AGR - that metal is gone, being used in their operations, and may never come back if they go bust (thru fraud etc).

    Second, I would rank the metal borrowed from banks above the retail client liability. You seem to dismiss this $112m owed to banks in calculating coverage %. But in reality, who is likely to get their hands on a pile of metal first, the banks, or the little guys?

    From PM's perspective, clearly the loan (to AGR) can evaporate, whereas the debt (to banks) never will (even if they all went bankrupt).

    The correct phyiscal coverage (with prudence) would be <40%...88m metal on hand, vs 222m liabilities. The other 60% has been lent out, which adds greater counterparty/credit risk, and another layer of legal/title risk.

    And as stated above...the 40% coverage is probably misleading if you are a retail client, because all of the $88m would likely go to the banks first in the event of PM default.

    The retail deposits seem to be covered by an IOU from AGR.

  17. You are correct that the Depository metal is covered in part with an IOU from AGR Matthey. However, this is not some transaction over which the Mint has no control. It should be noted that AGR Matthey is in Perth, that the metal loaned to it has not "gone" and is in their operations in Perth. The Mint has three of its directors on the Board of AGR Matthey, one of which is the Chairman of the Board. In other words, we are very close to what they are doing to ensure that they are using our depositor's metal prudently - that the metal does not disappear.

    On the matter of loans from the bullion banks, they are unsecured, so there is no reason why they would get priority over Depository clients or anyone else.

    In any case, it is somewhat irrelevant to talk about bankrupty and losses and creditors, because the entire operations of the Mint are guaranteed by the West Ausralian Government. As a result, should there be any shortfall, say because of theft or fraud (and the Lloyds insurance does not pay out), the the Government is on the hook for the loss. Ultimately this means that Depository clients have an exposure to the Government.

    I think these two points change the nature of your risk assessment.