THERE is a story that John Maynard Keynes once messed up when speculating on wheat futures. Instead of buying at a low price and selling higher, without ever having to take delivery of the wheat, he was caught out: the market went the wrong way. The Cambridge academic rushed to sort out storage for dozens of sacks of grain in the King’s College chapel, but thankfully the hapless economist managed to sell on before having to use it.
Nowadays, taking delivery of your commodity bet is the exception rather than the rule, which is why it made news recently when one investor in ETF Securities’ (ETFS) Gold Bullion Securities exchange-traded commodity (ETC) chose to trade in his paper gold for the real thing. The ETC has around $5bn in assets under management but this is the first and only instance of an investor taking delivery of the physical gold backing the security.
The news begs the question of how many more investors could choose to swap their paper assets for bars they can hoard in their mattress. ETFS’s head of product development Townsend Lansing thinks not many – most inquiries into the prospect end with the investor deterred by the sheer cost of hauling gold bars out of one vault and into another.
ETFS’s £750 fee is the least of it: bullion hoarders also have to negotiate with the current custodian of the gold – that is, the bank in whose vaults it lies – to have it shuttled up to ground level and put into a suitably secure vehicle. Then there is the cost of insurance during transit and fees to negotiate for the opening of an unallocated account in a new storage facility.
If you want your gold stored in an allocated account (which means that even if the custodian goes bankrupt, the gold is yours and is not counted towards the counterparty’s assets like a bank account), you will have to pay extra. And most storage institutions also charge an annual fee for storing the goods, with quotes varying from 0.12 per cent of the gold’s value to 0.5 per cent or higher. With all these costs to be negotiated, it is hard to provide a definitive total cost figure, but a lone retail investor is unlikely to have the advantage in striking a deal.
If even after the costs, you are set on getting your hands on the yellow stuff, don’t assume that every physical gold-backed product will give you delivery. Deutsche Bank’s physical gold-backed ETC, for example, does not allow delivery because of concerns that doing so would force the product’s fees above 0.29 per cent and that the product would thereby become non-UCITS compliant.
The rules are not 100 per cent clear: UCITS funds are not permitted to take delivery of commodities, but regulators have not stipulated whether this means that they cannot invest in products that merely offer the possibility of commodity delivery. An ETC’s policy will simply depend upon its providers’ preferences.
Once the gold is yours, you do have options beyond shipping it straight back into JP Morgan or HSBC’s vaults. The Deutsche Borse, for example, recently launched its Xetra Gold fund in the UK: the product enables investors to receive their gold in units of one ounce and will let you choose the custodian bank and personally witness the bars’ delivery. BullionVault, meanwhile, will store and insure your gold for a 0.12 per cent annual fee.
Gold redemption might not make financial sense, but there are nonetheless dozens of options for the cost-conscious investor to explore. Short of burying the bars in your garden, however, you will have to place your trust in the reliability of an established financial institution at some point.