18 December 2013

Implications of ETF redemption in physical gold coins

In August ETF Securities announced that shareholders of its gold ETF would be able to redeem their shares for physical bullion coins from the British Royal Mint.

The Perth Mint's ASX listed gold product, code PMGOLD, had physical redemption in any Perth Mint bullion bar or coin built into it from its start in 2003. Good to see ETF Securities catching up ten year later :)

Perth Mint and ETF Securities are now the only ETF issuers with real retail level redeemability - other funds that do allow physical redemption (many don't at all) like Sprott's PHYS do so only in 400oz bars, which is unrealistic for normal investors.

I haven't seen any further follow up or media about this option, so assume they haven't been inundated with requests.
The question it raises for me is that if more ETFs start offering this feature, it will put additional pressure on the mints during high demand periods. As I've blogged here many times, there is limited production capacity worldwide in the minting business, so expanding the ease with which ETF investors (who I would assume are generally not physical holders) can convert into physical will just make the production capacity issue even worse when there is an uptick in interest in physical. The result will be longer shortages and higher premiums.

ETF redeemability into coins is also a potential threat to coin dealers and online businesses like Bullion Vault and Gold Money. An ETF that becomes a full service gold vendor could be a very appealing alternative, given that the buy/sell spread on an ETF are much tighter than those offered by dealers. The only thing protecting the dealers is the somewhat cumbersome nature of the redemption process.

1 comment:

  1. Not pertinent to this posting.. was just reading elsewhere and came upon their invite to comment.

    Of course, your commenters don't qualify. So maybe you could affix it to verbal forays at those meaner forums you frequent.


    Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied.

    If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.


    It's at Mr Ritzholt's www.ritholtz.com