In the last 15 years, gold exchange traded funds (ETPs) have become an increasingly popular way for investors, to gain exposure to the precious metal in their portfolio.
Bought and sold like a regular share, such products track the price of gold, offering the same economic exposure to investors as physical gold bars or coins, without the need for investors to personally store the gold bullion themselves.
This tends to make them easier and more liquid to trade from an investor’s perspective, while the fact they are listed on a regulated exchange provides additional comfort.
Gold ETPs are also often the lowest cost way for many investors to access gold, with trading spreads that are typically sub 0.10%.
Below is a list of questions advisers may wish to consider if choosing a gold ETP to include in client portfolios.
Questions to ask when picking a gold ETP – and the answer for Perth Mint Gold (ASX:PMGOLD)
What is the management fee?
Management fees eat away at the return investors earn on any asset class, including gold. All other things being equal, the lower the management fee the better, so if the gold ETP you are looking at charges more than its peers, it’s worth asking why.
ASX:PMGOLD charges a management fee of just 0.15%.
Who is the product issuer?
It is critical to know the background of the organisation issuing any financial product, including gold ETPs. When was it founded? Who owns the company? How big is its balance sheet? What expertise does it have in the precious metal market?
ASX:PMGOLD is issued by Gold Corporation (which trades as The Perth Mint). Gold Corporation has more than a century of experience dealing in precious metals. It is 100% owned by the Government of Western Australia, has more than AUD 6 billion in assets and turns over more than AUD 20 billion in precious metals each year.
Who are the counterparties to the gold ETP?
Apart from the product issuer, most gold ETPs will have at least three other counterparties. These include the trustee, the custodian (where the gold sits), and the market maker (s).
ASX:PMGOLD is fully operated by Gold Corporation, which is the issuer, custodian and market maker for the product.
Who holds legal title to the gold backing the product?
In nearly all cases, investors in a gold ETP don’t actually own title to the gold itself. They own a financial instrument, with that financial instrument backed by gold.
The custodian of the gold might be the owner, or it might be a trustee company. It is worth asking that question and making sure you are comfortable with the answer, as that custodian or trustee is arguably your primary counterparty.
ASX:PMGOLD is backed by gold held by The Perth Mint on behalf of the fund investors.
How is the gold backing the product sourced?
It is worth asking the product issuer of a gold ETP where it sources the gold backing its product. Some may be entirely reliant on the gold custodian they use because they don’t have access to gold themselves.
ASX:PMGOLD is backed by gold held by The Perth Mint. This includes gold from Australian gold miners, with Australia being the second largest gold producing country in the world over the last ten years.
Where does the gold physically sit?
It is worth knowing where the gold backing an ETP is sitting. Most gold ETPs use reputable high-profile gold custodians, but there can still be a degree of jurisdictional risk if the gold is physically sitting outside Australia.
ASX:PMGOLD is backed by gold stored in The Perth Mint’s vaults and across its operations, including both the refinery and minting divisions.
What form is the gold stored in?
Some gold ETPs are backed by allocated metal, which means numbered bars that typically sit in a vault, owned by the trustee, or custodian, on behalf of the product investors.
Others are backed by unallocated metal, which can include gold that is in numbered bars, as well as gold that is being refined, cast or minted.
ASX:PMGOLD is backed by gold held in unallocated form in The Perth Mint’s vaults and across its refining and minting operations.
How is liquidity provided to the product?
All gold ETPs require market makers to provide liquidity to the product.
It is worth asking whether the product issuer does the market making itself (this alone is a good indication it has a sizeable balance sheet and expertise in precious metals trading directly), or whether or not it outsources this function.
ASX:PMGOLD market making is provided by The Perth Mint directly. As such, investors benefit from the more than AUD 20 billion in liquidity that The Perth Mint accesses in the global precious metals marketplace.
Can your investment be redeemed for physical gold, and if so, how?
A key attribute of a gold ETP is whether or not the ETP holdings can be converted into physical gold for delivery or not. Some can’t be converted at all, whilst others may require overly complex processes that make it all but impossible to do in practice.
ASX:PMGOLD investors can convert their holdings into a Perth Mint Depository account. As direct clients of The Perth Mint, they are then able to ask to have their gold holdings converted into physical gold bars which can be delivered to them or collected in person. Investors simply need to fill in an Exercise Notice (which is contained within the PDS). Fees apply
Are there any additional investor protections in place?
It is worth considering what investor protections are in place should something happen to the gold custodian who is storing the precious metals backing a gold ETP.
ASX:PMGOLD investors are protected by the unique government guarantee that protects all investors in The Perth Mint Depository.