With the recent introduction of the Royal Canadian Mint’s ETR program, I thought now might be a good time to really explain why I’m in the business that I’m in and why I think that taking physical possession of your bullion is the safest, most cost effective way of investing in precious metals.
This November 28th a new offering of a gold investment vehicle by the Royal Canadian Mint will close. This program, known as an Exchange Traded Receipt (“ETR”), is another in a long line of paper-gold investments that are now trading on securities exchanges worldwide. It, like all of the other programs, comes with a slew of fees, risks and other items that investors need to be aware of because they can have a serious impact on their financial security especially during these volatile times.
The number one question investors should ask when participating in ETR’s, or any other kind of proxy gold investment, is “What are the costs?” The Mint’s program has a number of them that make ETR’s unattractive. The first is the 3% agent’s fee. What this means is that for every $100 invested in to the ETR’s, $97 is used to purchase gold and $3 is handed over to the banks and brokerages as their commission for making a successful sale. The second is the storage fee, which equates to 35 basis points, or 0.35%, per annum. So, for every year you hold an ETR the amount of gold your $100 investment represents is reduced by $0.35. The third is the redemption fees, of which there are many. If you’re redeeming your ETR’s for cash, you will immediately pay a 5% fee. So say you bought $100 in ETR’s and redeemed them the very next day for cash. You would have immediately paid at least 8% in fees and commissions! If you redeem for physical bullion, you will pay $100 per redemption. On top of that you pay an additional 5% if redeeming in 1 oz coins, $15/oz if redeeming in 1 kg bars and $1/oz if redeeming in 400 oz bars (this drops to $0.25/oz after 10,000 oz’s).
The storage fee bears further scrutiny because of the way it works. Every year, the Mint will sell 0.35% of the gold stored under the ETR program in order to collect the fee. This means that over time, the amount of actual gold each ETR represents will steadily deteriorate. The longer the program operates, the greater the reduction in gold backing behind each ETR. Compare these fees and costs to the premiums charged by physical precious metals dealers like myself and it's easy to see where and investor will come out ahead.
Many programs include this, and the ETR’s are no exception. ETR holders must redeem a minimum of 10,000 units in order to be eligible to receive physical gold. At an initial offering price of $20/ETR this means that you have to have at least $200,000 invested before you would ever see any physical gold from this program. Anything less is paid out in cash. Other funds are no better. The Sprott Physical Gold Trust has a minimum redemption of 400 oz’s of gold. SPDR, Claymore, and iShares gold funds have a minimum of 9,730, 4,484 and 488 oz’s respectively (based on the October 26, 2011 London PM Gold Fix) and only for authorized participants. Some funds, like the Central Gold Trust, don’t let anyone redeem for physical gold at all!
Since the Mint is operating the program, an investor in ETR’s exposes themselves to a number of risks based on how successful the Mint is at operating the program. Many programs, including the ETR program, can be terminated at the counterparty’s discretion. At least with the ETR’s, if the Mint terminates the program, holders will be given 90 day’s notice and the option of redeeming their ETR’s for gold. Many other programs simply allow the counterparty to declare force-majeure and pay out their unit holders in cash only. The Mint can, however, at their discretion suspend all redemptions of ETR’s for gold, so this in effect provides investors with little security that they will receive their gold in the event of severe market events or other issues that may very well arise in the future given the economic climate.
Furthermore the gold in the ETR program is not allocated, meaning there are no specific units of gold attached to each ETR. The gold is not held separately from other unallocated bullion accounts held at the Mint and so all of the gold stored under every unallocated gold account will be co-mingled. Redemptions from one unallocated program may actually affect the operations of the other programs. The unallocated gold is also not audited or separately inspected on a stand-alone basis. This makes it very hard for the Mint to know exactly how much gold should be assigned to each unallocated gold program.
Another big risk that is unique to the ETR program is the fact that the Mint is exempt from many of the continuous disclosure requirements that other issuers on the TSX are subject to. This is a clear double-standard created by the Government, giving the Mint special treatment and shielding from securities regulators. The exemption makes it much harder for investors to get any information about the ongoing operations and financial condition of the Mint. In the event of insolvency, unallocated gold holders are generally the last to be paid in a bankruptcy since they are listed as unsecured creditors.
Access to Liquidity
In an emergency, it is important to be able to access cash. This has meant the difference between life and death for many individuals and families during times of great economic and political turmoil. Investing in things like ETR’s can take weeks or months before you ever see any cash. Having physical precious metals stored at home provides much greater liquidity because they can not only be easily bartered with, but can be converted to cash at a number of outlets in a matter of hours or minutes.
All that being said, the Mint is a very respectable institution as are a number of other issuers of gold and silver ETF’s, trusts and other investment vehicles. However, even the best of institutions can fail during economic crises through no fault of their own. Because of the lower costs, greater liquidity, security and convenience of owning physical precious metals I feel that only possession is real protection in these markets. There’s also something magical about holding a 1oz or even 10oz bar of gold in your hand. The sheer size-to-weight alone is enough to impress someone the first time they pick one up.
My company does offer storage to high-net-worth and institutional investors, but due to the risks associated with unallocated programs I felt that it would be inappropriate for a company exalting the benefits of physical ownership to operate one. Instead, Maple Leaf Metals Exchange offers storage on a fully-allocated basis. Bars are numbered and registered in the name of the buyer and not held on our own balance sheet so there is no risk of loss to the investor in the event that MLME meets an untimely end. We are simply acting as your custodian. All bullion held in our allocated storage program is fully insured in the event of loss due to fire, theft or other risks. We use third-party, professional vaulting facilities and armored carriers provided by companies with a long-established reputation such as Brinks in order to ensure the soundness of our program. I believe that this is ultimately the best way for investors to purchase large quantities of bullion as they will benefit from a cost structure approximating the unallocated accounts and the greater level of security provided is a key feature that guarantees that the bullion will always be there when you need it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.