ETF Securities replies to "spreads widen dramatically" claim

ETF Securities has replied to Gold ETF Investor's questions about spikes in the spreads (trading costs) of one of its most traded physical gold ETFs.

Figures produced by London Stock Exchange each week calculate 'time weighted' spreads. In the week ending 13 April 2012 a handful of ETF Securities products saw their spreads spike.

Those listed by Gold ETF Investor were:

PHGP: up to 1.26% from 0.14%
SGBS (ETFS Physical Swiss Gold): up to 2.41% from spreads between 0.25%-0.6%
PHSN: up to 14% up from 2.3% the week before.

New gold ETF gives retail investors access to real gold

A new physical gold ETF launched last week allows retail investors to turn their gold shares into 10g gold bars for 750 rupees (£9/$14) fee. It's only available in India but would an ETF like this work in the UK?

Net £16m of physical gold ETFs sold on LSE on Tuesday March 6 2012

Total sales - I think - of physical gold ETFs on the London Stock Exchange today were worth £40.6 million while total purchases came to £24.6 million = net sales of £16 million.

Gold to fall to $1,500? Buy now find out later

The pound fell even further against the dollar today and ETF Securities physical gold (PHAU) closed nearly 1% higher. Consequently this Google chart shows the sterling physical gold ETF (PHGP) higher than the dollar PHAU (when the pound is low against the dollar its a good time for a sterling investor to sell dollar assets - but I'm looking to buy now and a weak pound doesn't help).

However the BlackRock Gold and General Fund fell again today. I bought £250 worth of units today (Thursday) and I put in order for another £250 for Friday. I haven't properly checked the costs for buying like this yet though, although I can't see why it would be a problem. The fund is managed by Evy Hambro whose dad is Peter Hambro, founder of gold mining firm Petropavlovsk, formerly Peter Hambro mining. Evy's old boss, the old manager of BlackRock Gold and General, Graham Birch is now a director at Petropavlosk... of which BlackRock owned a large chunk... it's like investing in some kind of gold dynasty.

As yet no sign of the fall forecast by John C Burford yesterday. However Julian Phillips of Goldforecaster.com, writing for BullionVault, is also expecting a big drop.

In piece posted today he said: "The threat of a fall in the Gold Price to $1,500 appears real at the present moment."

But he added: "If a fall back to $1,500 or anywhere below $1,650 we believe it will be for a short period only. It might even drop there for only a day then bounce back to current levels."

Sebastian Lyon reported on the progress of Personal Assets Trust today and still has just over 12% in gold which is classed in cash. This used to be held in gold ETFs but is now done via a gold account after he converted the shares.

Before I forget, I was trying to get hold of spreads for PHGP and PHAU from ETF Securities. They never got back to me. This old article from Index Universe suggests that buying or selling ETFs during periods of volatility (basically when you really want to do it) can be an expensive business. The article says PHAU is among the best but I don't know about PHGP which a lot of people still buy.

How much gold do I actually own?

I own 18 ETF Securities Physical Gold ETF shares with the (PHAU) ticker on the London Stock Exchange. Each of these shares entitles me to 0.0982449 of an ounce of gold (according to this page on ETF Securities web site:http://www.etfsecurities.com/msl/index.asp).

Why have I got this much gold per share? According to the PHAU prospectus it's because everyday that the share exists a small chunk of it is paid back to ETF Securities. Over a year these small chunks will equal the 0.39% annual management fee.

The amount of gold per share diminishes every day from the date of the launch which means the older the ETF the less gold each of its shares will be entitled to. When PHAU shares were launched in 2007 they were entitled to 0.1 of an ounce of gold and that has been diminishing ever since. Hence the 0.0982449 of an ounce of gold per share today.

The chart below shows the rate of decay for three physical gold ETFs from November 2009. I picked this date because it was the launch of the ETFS Physical Swiss Gold (SGBS). At launch SGBS shares were entitled to 0.1 fine troy ounce of gold each.

The US dollar version (PHAU) which I own was launched in April 2007 so is entitled to less gold than the Swiss ETF.

Meanwhile Gold Bullion Securities (GBS) is even older having started in 2003. It also pays a higher management fee of 0.4%. However it allows investors to convert their shares into physical gold (which means different rules apply to it - it can't be held in an ISA and the annual management fee is slightly higher (question number 28)).

Even though I am never likely to touch the gold I own, it determines the value of the shares. So the value of PHAU shares diminish inline with the amount of physical gold backing it.

In a 2009 article by Index Universe Ronan O'Shea of market-making firm Nyenburgh, said: "Most of the time the different physical gold trackers have traded in line with the asset value implied by their gold content, with occasional premiums to NAV, which have occurred more often for those funds with a less-diversified creation and redemption mechanism (where ETFs have fewer official market makers - known as 'authorised participants' - who have to offer a price at which they will buy ETF shares from investors and price at which they will sell to them).

What is that gold worth today?

So, if I own 1.7684082 ounces of gold, what do I actually get when I sell it?

At 4.30pm today, when the London Stock Exchange shut up shop, my broker, Hargreaves Lansdown was offering to buy my shares for $176.40 each. If each share is entitled to 0.0982449 of an ounce of gold then they would be paying me $1,795.5 per ounce (176.4/0.0982449).

That's before working out what the pound dollar conversion rate would be or taking into account the £11.95 cost of selling.

But first I want to check that I am actually getting a reasonable deal on the gold spot price. According to BullionVault's spot price chart the selling price of gold was pretty close to $1,795 at 4.30pm.

It looks like I've done better than I should have done!

But what have I got in pounds? If I take my 1.7684082 ounces of gold and multiply it by the value of $1,795.5 per ounce it comes out at $3,175.20 for the whole lot. When I wrote this story the pound was buying $1.60 (Google Chart) and so my investment would be worth £1,984 in total.

Does this correspond with the pound denominated version of this ETF? The value of the PHGP exchange traded fund was £109.65 to sell. I have 18 shares, this would have come to £1,973, so I'm out by a bit - it could be the exchange rate (I don't know which one they're using, or just straight maths failure).

I can also check the value of my holding in the Hargreaves Lansdown account which is based on the bid price and on a $1.6072 exchange rate. That comes out a lot closer to the PHGP value (not surprisingly!) at £1,975.61

If I took my gold to a pawnshop in Hackney, what would I get?

All together, in ounces my shares hold 1.7684082 oz(troy) which converts into 55.0036 g.

If I wanted to sell my gold in a Hackney pawnshop I'd got to one called Cashier (last month they offered me the best deal) and today their selling price was £25 per gram which would have got me just £1,375 for all my gold. Bear in mind that they only offer it on 22 carat gold and the gold I own is 24 carat.