Physically-backed gold ETCs offer partial sanctuary from eurozone storm

May 7th, 2012 | By | Category: Commodities

The election over the weekend of socialist Francois Hollande in France and the rejection of the mainstream pro-austerity parties in Greece threaten to push the eurozone back into deep crisis.

Physically-backed gold ETCs provide sanctuary from eurozone crisis

Physically-backed gold ETCs, such as the ETFS Physical Gold (PHAU), offer a degree of sanctuary from the eurozone crisis.

Markets in Greece have already reacted violently to their country’s election results, with the Dow Jones Greece Total Stock Market Index down over 7%. Meanwhile the reaction to the French presidential election has, so far, been more benign. However, with Hollande promising to renegotiate Europe’s Fiscal Pact, market volatility looks set to rise.

With a potential intensification of Europe‘s woes and instability once again back on the radar, investors will likely seek out the relative sanctuary of ‘safe-haven’ assets such as German bunds, UK gilts and US treasuries. But as last year’s US credit rating downgrade demonstrated, none of these bonds are entirely risk free. Far from it, in fact: the UK and US economies remain stuck in a moribund, low-growth regime with high levels of debt being fuelled by budget deficits, while German taxpayers are increasingly likely to be lumbered with most of the bill for future bailouts.

All this means that the other favoured safe haven – gold – is likely to receive renewed investor interest. Indeed, recent research from Legal & General Investments revealed that investors are expecting gold to do well. According to their research, one in five (19%) IFAs believe the price of gold will hit $1800/toz or more by the end of 2012 – a rise of 10% by the end of the year, based on the current gold price. To further reinforce this confidence in gold, the research shows that a third (32%) of IFAs believe that the price will finish above $1600/toz at the end of the year.


ETFS Physical Gold ETC (PHAU)

– Simple, cost-efficient and secure way to access
the gold market

– 100% backed by physical allocated gold conforming
to the London Bullion Market Association’s (LBMA)
rules for Good Delivery

– Product has over $7bn in assets providing high
liquidity (tight spread) thus ensuring low Total
Cost of Ownership

– UCITS compliant, London listed, UK Reporting
Status, eligible for ISAs and SIPPs, TER 0.39%

Tim Gardner, Co-Manager of Legal & General’s Multi-Manager fund range, said: “We have seen the price of gold increase significantly year-on-year over the past decade. In an era of debasement of paper currencies, the yellow metal remains the ultimate ‘hard currency’ and should continue to receive support from highly accommodative monetary policy and ongoing demand from central banks looking to diversify their reserves away from the likes of the US dollar.”

Analysis from Goldman Sachs, too, suggests investors would be wise to look at gold:

“Gold prices remain too low relative to the current level of real rates. Under our gold framework, US real interest rates are the primary driver of US$-denominated gold prices. However, after being remarkably strong in the first half of 2011, this relationship broke down last fall, with gold prices falling sharply in the face of declining US real rates, as tracked by 10-year TIPS yields. While gold prices have returned to trading with a strong inverse correlation to US real rates since late December, at sub-$1,700/toz they remain below the level implied by the current 10-year TIPS yields….We reiterate our constructive outlook for gold prices in 2012 and our 3-, 6- and 12-month forecasts of $1,785/toz and $1,940/toz, respectively.”

For investors seeking exposure to gold, there are a number of London-listed products to choose from.

Physically-backed gold ETPs:

iShares Physical Gold ETC (SGLN)
The iShares Physical Gold ETCs are physically-backed Exchange Traded Commodity (ETC) offering investors accessible, liquid and transparent exposure to the day-to-day movement of the price of gold, as per the London PM fix price. The securities are backed by physical gold bullion held as allocated gold bars with the custodian, JPMorgan. London listed. TER 0.25%.

db Physical Gold ETC (XGLD)
The db Physical Gold ETCs are backed by a direct investment in physical gold and provide investors with exposure to the gold spot price via London Good Delivery Gold Bars. The issuer (Deutsche Bank) has direct and sole ownership of the gold which is stored in secure vaults in London (JP Morgan and Deutsche Bank). Each physical ETC security entitles the holder to a specified quantity of gold of the segregated pool owned by the issuer. London listed. TER 0.29%.

Source Physical Gold P-ETC (SGLD)
Source Physical Gold P-ETCs provide physically-backed exposure to the performance of the London Gold Market PM Fixing Price in USD. Each Gold P-ETC is a certificate which is secured by gold bullion held in JP Morgan Chase Bank’s London vaults. London listed. TER 0.29%.

ETFS Physical Gold ETC (PHAU)
ETFS Physical Gold ETCs are designed to offer investors a simple, cost-efficient and secure way to access the gold market by providing a return equivalent to movements in the gold spot price less the relevant management fees. PHAU is backed by physical allocated gold held by the custodian (HSBC). All physical gold metal held with HSBC conforms to the London Bullion Market Association’s (LBMA) rules for Good Delivery. London listed. TER 0.39%.

The following two products are Exchange Traded Notes (unsecured debt securities) and thus not physically backed:

Tracks the Physical Gold Spot Price. London listed TER 0.40%

Tracks the UBS Bloomberg CMCI Gold Total Return Index measuring the collateralised return from a basket of Gold futures contracts. London listed. TER 0.26%

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