Jun 8, 2012
When a retail investor who has never considered investing in Gold before does so for the first time the first things they gravitate to is the SPDR Gold Trust ETF (AMEX:GLD). With a market cap of more than $67 billion GLD has nearly become synonymous with a liquid gold position and is one of the biggest ETF’s in the world. Because gold is so volatile due to a variety of factors both market driven and political the liquidity offered by GLD is desirable to a number of investors who have little conviction in their investment thesis for gold.
For those more fundamentally inclined there are other options like the Central Fund of Canada (NYSE:CEF) and the Sprott Physical Gold Fund (AMEX:PHYS). Both of those are closed-end funds which can trade at a discount or premium to net asset value depending on the demand for physical gold versus the spot price on the futures market. In both cases those funds offer an investor exposure to physical gold that has no paper component or has been rehypothecated.
As any veteran of the gold trade knows there is a link between fund flows into GLD and that gold being sold short to suppress the price in the futures market. Moreover, GLD has suppressed the prices of mining shares. Since 2009 the Market Vectors Gold Miners ETF (AMEX:GDX) has underperformed GLD by nearly 2:1 (43% vs. 80%). The market cap of GLD has risen 3.4:1 versus GDX, $17.5 billion vs. $5.2 billion. To give you an idea of how quickly money moves into GLD, $3.77 billion moved into the fund since June 1st, while $53 million was added to GDX.
With the situation in Europe deteriorating and a the very real possibility of a full-blown bank holiday/market shut down happening, all assets held in the U.S. and European banking and depository system are at risk of confiscation or at least becoming very illiquid very quickly.
In 2011 ETFS launched the Asian Gold Trust ETF (AMEX:AGOL) and the Swiss Gold Trust ETF (AMEX:SGOL). Neither of these funds control near the assets of GLD, CEF or PHYS but they offer gold investors diversification of location versus all of the others which hold their gold within the U.S., Canada and London.
AGOL holds its gold in Singapore, while SGOL does so in Switzerland. It is the only physical gold fund in the world holding gold outside of the North America and Europe. The fund is very small and very illiquid, with less than 1000 shares trading hands each day. AUM is just $73 million and the bid/ask spread is $1.35. The 1 year average premium to NAV for the fund is 0.52% which is slightly more than the bid/ask plus expense ratio of 0.39%. Yes, GLD generally trades at a higher premium to NAV and is more liquid. But, AGOL holds only gold bullion, unallocated physical hold and cash. No paper gold derivatives are held in place of physical gold.
AGOL and SGOL both represent the only open-ended funds that deal directly in physical gold in the same way that the two Canadian closed-end funds do. Since the fund is so small and each basket of 50,000 shares represents a $7.8 million buy there is the opportunity with higher demand for the fund to trade at higher NAV premiums as it grows in size.
Lastly, consider that Singapore is in the process of placing itself at the center of the physical gold trade in Southeast Asia; having rescinded all sales taxes on the buying and selling of bullion quality gold and silver. These taxes are set to expire in October. They are also courting precious metals smelters into the country increase the local supply, with the stated goal by the Singapore Ministry of Finance to create an Asian gold and silver fix that is more useful for trading on this side of the world.
Singapore is rapidly becoming one of the major financial centers in the world. Their push this year to integrate the SE Asian equity markets, while courting gold inflows and creating a standardized and mandatory clearinghouse mechanism for all derivative contracts set it apart from the markets in the West and its enormous shadow banking system. As capital flows from West to East having some of your assets in that part of the world only makes sense.