A Golden Opportunity

Gold is one of the oldest investment assets and commodities in the world and can be used to provide balance against changes in the share and property markets. The ASX has opportunities to buy into this commodity via exchange traded commodities (ETC).

What are the mechanics of this? ETCs track the performance of an underlying physical commodity or commodity index allowing investors to gain direct exposure to the underlying asset without the need to trade futures or take physical delivery of the commodity.

Aside from the underlying asset, ETCs are very much like Exchange Traded Funds and are traded and settled on ASX, just like shares, making them both accessible and affordable. 
ETCs are open- ended securities meaning new units may be created and existing units may be redeemed in the primary market based on market demand by the market maker. This unique feature helps ensure the market price of the ETC tracks closely to its Net Asset Value (NAV). It also creates an arbitrage opportunity should the market price of the ETC move away from its NAV.

ETCs replicate the performance of the underlying commodity or commodities index because the issuing entity would have a direct investment in the underlying asset or the commodity derivative contract. As such, the investment value of a portfolio would generally rise and fall in direct proportion to the price of the underlying. This broadens the investment opportunities for potential investors because for many commodities, no listed companies exist.

Further, in certain circumstances ETCs may be a useful hedging tool against currency risk. ETCs are traded and settled on ASX in Australian dollars. For underlying commodities which are valued in a foreign currency, fluctuations in the exchange rate can affect the value of the portfolio. As such, a weak Australian dollar will increase the value of investments held in non-Australian dollars. On the other hand, if the Australian dollar rises, the value of investments held in non-Australian dollars will fall.

The first ETC to launch on ASX was an exchanged traded gold product in 2003. There are now a number of ETCs currently quoted on ASX.

The development of Gold Bullion Securities (ASX code: GOLD) has been a joint initiative between Gold Bullion Limited and the World Gold Council. A GOLD security consists of a gold bullion share of nominal value and a beneficial interest in approximately 1/10th of one fine troy ounce of gold bullion held on trust for the holder of the security.

The gold is held in London vaults by a custodian. A trust deed establishes a separate trust for each holder of GOLD so that the holder is absolutely entitled to the gold bullion held in the vaults. Each time a holder transfers GOLD to a new holder, the beneficial interest in the gold bullion automatically transfers to the new holder.

About the Market Pricing

The price of GOLD is based on the spot price of gold less the daily Management fee.
Daily price of GOLD: = 0.10oz of Gold x Gold spot price less daily Management Fee 
The spot price for gold is based on the LBMA’s specifications for Good Delivery (loco London), which is an internationally recognised and transparent benchmark for pricing physical gold.

Investment Objective

ETFS Physical Gold (GOLD) is designed to offer investors a simple, cost-efficient and secure way to access the precious metals market. GOLD is intended to provide investors with a return equivalent to movements in the gold spot price less fees.

The graph above shows the relationship between the GOLD price listed on the ASX and the All Ordinaries Index over the last 2 years. There is a clear inverse relationship between the two as the share prices go down the gold price comes back up.

As with all investment opportunities you should confirm if this relates to your overall investment objectives and is suitable to achieving your investment outcomes.

Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 1300 772 643) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.

The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs.  Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.