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Gold ETR versus Vaulted Gold

November 07, 2011

A few days ago we wrote about the new gold investment product Gold Exchange Traded Receipt (ETR) which will be introduced by the Royal Canadian Mint.

We now will take a closer look at the Gold ETR and its characteristics and compare the Gold ETR to vaulted gold.

Gold ETR

According to the publicly available information, the Gold ETR has the following characteristics:

  • In an Initial Public Offering (IPO) during November 2011, the Royal Canadian Mint targets to raise approximately 250m Canadian Dollars. For this amount gold will be purchased on behalf of the ETR purchasers.
  • The Exchange Traded Receipts will provide purchasers with direct ownership in physical gold bullion held in custody at the Mint’s facilities in Ottawa. The gross spot price of each receipt is $20. After expenses and commissions each receipt should purchase approximately 0.4 gram of gold at the current gold price.
  • According to Mr. Moore, an executive director of the Royal Canadian Mint’s bullion and refinery business, the ETRs are part of an unallocated storage program.

The information statement dated October 28, 2011, contains the following risk factor:

“The ETR Holders’ gold will not be allocated but rather will be unallocated within the general supply of physical gold within the Mint’s refinery and production operations.

The Mint intends to use the physical gold owned by ETR Holders within its general refinery and production operations and as such it will not be held separate and stored separately from other unallocated gold bullion held at the Mint, as is done for certain gold customers on a fully allocated basis. The Mint believes it can manage its unallocated gold in a manner that fully protects the ownership and related rights of ETR Holders. However, unallocated gold under the custodial care of the Mint, including the unallocated gold of ETR Holders, will not be held separately or audited or inspected on a stand-alone basis.

In the event that any of the gold held by the Mint on an unallocated basis is subject to non-compensable loss, damage or destruction, all owners of such unallocated gold, including both ETR Holders and non-ETR Holders, will be subjected to such loss on a pro rata basis.”

Subject to certain conditions ETR holders shall be entitled to redeem their ETRs for bars, coins or cash.

The ETRs may not be offered or sold in the United States because they have not been and will not be registered under the U.S. Securities Act of 1933.

Our current conclusion is that Gold ETRs could expose investors to risks which are similar to the risks faced by owners of unallocated certificates or accounts.

Vaulted gold

Vaulted gold provides investors with outright ownership in gold. Vaulted gold is physical gold which is the property of the investor and which is held by the provider of the vaulted gold or by a vaulting operator on behalf of the investor. Vaulted gold can be offered in the form of fully allocated gold, i.e. each investor fully owns specific gold bars or gold coins, or in the form of so-called pooled-allocated gold. In the case of pooled-allocated gold, the individual investor does not own a specific piece of gold, e.g. a bar or coin, but several investors collectively own a large gold bar or a pool of bars, i.e. the individual investor only owns a share in a gold bar or in a pool of gold bars.

In contrast to Gold ETRs, vaulted gold is offered and can be sold in the United States. Thus, vaulted gold is an alternative for US citizens to invest in physical gold. In the case of vaulted gold, investors acquire ownership in physical gold and do not invest in a financial product.

Advantages of vaulted gold over gold ETRs

Vaulted gold provides advantages over gold ETRs in terms of direct ownership of physical gold and safety. Some of those advantages are:

  • In the case of trustworthy providers of vaulted gold, the physical gold is held by a custodian which is independent from the provider of the vaulted gold
  • Vaulted gold holdings with trustworthy providers are not mingled with other gold stocks and production operations
  • Buyers of vaulted gold immidiately acquire outright ownership in physical gold whereas gold ETRs are issued through an IPO
  • The minimum physical redemption on the Mint’s Canadian Gold Reserves ETR program is 10,000 ETRs which are currently worth approximately $200,000. In contrast, minimum physical delivery of vaulted gold is typically much lower if there is a minimum quantity at all.

More information on vaulted gold and providers of vaulted gold.

One Comment to Gold ETR versus Vaulted Gold

  1. Hyeeb wrote:

    Seems to me that the main difference lies in the choice of which piece of paper to hold in your hand. “Trust” is highly subjective. Would I trust a private vaulting service over an agency acting in the name of the British Queen? It’s a personal decision either way. Unallocated gold makes sense to the extent that you don’t have a pigeonhole for each and every client, which logistically makes no sense for a product that is intended to trade on an exchange. So long as the bullion holdings correspond 1:1 to the number of units issued for trade in aggregate, I would have no problem as a Canadian investing in this as ONE way to diversify. JMO

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