Warning on the existing Au and new Ag, Pt & Pd ASX listed ETFs
ETF securities, the issuer of the existing GOLD product on ASX, will shortly issue three more ETFs for silver, platinum and palladium. The prospectus (which also covers the existing GOLD product) has some alarming "features" I thought needed highlighting, and not just because GOLD is a competitor to the Perth Mint's gold warrant, ZAUWBA.
These are the facts, make up your own mind as to whether you consider these products suitable for long term holding or just short term speculating.
1.9 Transaction Documents. The documents which, in addition to this Prospectus, set out the terms and conditions relating to the Metal Securities and the holding of the Bullion comprise: The Constitution of the Company; The Trust Deed; The Custodian Agreements; The Service Agreement; and The Metal Sale Counterparty Agreement.
Comment: as with the US ETFs, you have a lot of counterparties involved that can in the case of a problem, all blame each other. You have to also read all these documents to fully understand the structure and therefore the risks involved.
2.2 Metal Entitlement. The ETFS Physical Gold securities (previously called Gold Bullion Securities) started in early 2003 with an initial Metal Entitlement of 0.10 fine troy ounces. The entitlement currently declines each day at a rate of 40 basis points per annum and will be 0.098118356 fine troy ounces as at 1 January 2009.
Comment: this is how all the ETFs work, except the Mint's warrant. Not so much a risk as an annoying aspect you have to keep in mind when looking at the ETFs price on the ASX and then divide by that (monthly) changing entitlement to work out the actual price per ounce your paying or receiving.
2.2.1 Management Fee. The fee is 0.39% for gold and 0.49% for silver.
Comment: the ZAUWBA product's management fee is 0.15%, why pay more?
2.4.3 Redemptions. A Holder may elect payment on Redemption to be in metal (the Metal Delivery Method) or cash (the Metal Sale Method) but may only elect the former if they have an unallocated metal account with a bullion dealer in London, who is a member of the LBMA or LPPM, to which such metal is to be transferred.
Comment: I don't know about you, but I don't have a London metals account and good luck trying to get one as an individual. Even if you can, you only get metal in London. This effectively means you can't redeem this product for physical. You can redeem ZAUWBA for any Perth Mint coin or bar, in Australia.
3.1 Where is the Metal? All gold and silver will be held by the Custodian at its London vault premises. ... The Custodian will be responsible for the transportation, handling and any costs associated with moving Bullion to or from its London vault premises and between any vaults of sub-custodians. As at the date of this Prospectus the Sub-Custodians directly appointed by the Custodian are the Bank of England, The Bank of Nova Scotia (ScotiaMocatta), Deutsche Bank AG, JPMorgan Chase Bank, N.A., UBS AG, Barclays Bank PLC, Johnson Matthey plc, Brink's Global Services Inc. and ViaMat International.
Comment: That's a lot of people holding your gold and silver, providing lots of finger pointing opportunities if things go bad.
3.2 Storage and Insurance of Metal. The Custodian (or one of its affiliates) may make such insurance arrangements from time to time in connection with its custodial obligations with respect to Bullion held in allocated form as it considers appropriate. The Custodian has no obligation to insure such Bullion against loss, theft or damage and the Issuer does not intend to insure against such risks. In addition, the Trustee is not responsible for ensuring that adequate insurance arrangements have been made, or for insuring the Bullion held in the Metal Accounts, and shall not be required to make any enquiry regarding such matters.
and
5.5 Custody and Insurance. Accordingly, there is a risk that some or all of the Bullion could be lost, stolen or damaged and the Issuer would not be able to satisfy its obligations in respect of the Metal Securities.
Comment: I find this an incredible statement. The custodian does not have to insure it, we don't intend to insure it and the trustee is not responsible for ensuring it is insured. What sort of custodianship is this? What a great business - give me your gold and if it gets stolen, that's your problem, just trust me I'm doing a good job.
5.6 Early Redemption of Metal Securities. The Company may, at any time, upon not less than 30 days’ notice by an announcement through the CAP to the Holders, redeem all Metal Securities of a particular type.
Comment: Now I don't think anyone would expect that an issuer of a product must be duty bound to continue to offer the product or service forever and ever. But 30 days, that's not much time for the investor to get out in an orderly manner. You may be forced to take a capital profit or loss when it does not suit you. Note also you must take cash, unless you have a London metal account.
Compare that to the "escape" clause that the Perth Mint put into ZAUWBA, which can only come into effect if we hold less than 100,000oz in the warrant and we have to give 6 month's notice (clause 12.1(e)). At least you have some time to arrange physical collection or sell at a price advantageous to you. Why couldn't ETF Securities offer the same sort of breathing space.
These are the facts, make up your own mind as to whether you consider these products suitable for long term holding or just short term speculating.
1.9 Transaction Documents. The documents which, in addition to this Prospectus, set out the terms and conditions relating to the Metal Securities and the holding of the Bullion comprise: The Constitution of the Company; The Trust Deed; The Custodian Agreements; The Service Agreement; and The Metal Sale Counterparty Agreement.
Comment: as with the US ETFs, you have a lot of counterparties involved that can in the case of a problem, all blame each other. You have to also read all these documents to fully understand the structure and therefore the risks involved.
2.2 Metal Entitlement. The ETFS Physical Gold securities (previously called Gold Bullion Securities) started in early 2003 with an initial Metal Entitlement of 0.10 fine troy ounces. The entitlement currently declines each day at a rate of 40 basis points per annum and will be 0.098118356 fine troy ounces as at 1 January 2009.
Comment: this is how all the ETFs work, except the Mint's warrant. Not so much a risk as an annoying aspect you have to keep in mind when looking at the ETFs price on the ASX and then divide by that (monthly) changing entitlement to work out the actual price per ounce your paying or receiving.
2.2.1 Management Fee. The fee is 0.39% for gold and 0.49% for silver.
Comment: the ZAUWBA product's management fee is 0.15%, why pay more?
2.4.3 Redemptions. A Holder may elect payment on Redemption to be in metal (the Metal Delivery Method) or cash (the Metal Sale Method) but may only elect the former if they have an unallocated metal account with a bullion dealer in London, who is a member of the LBMA or LPPM, to which such metal is to be transferred.
Comment: I don't know about you, but I don't have a London metals account and good luck trying to get one as an individual. Even if you can, you only get metal in London. This effectively means you can't redeem this product for physical. You can redeem ZAUWBA for any Perth Mint coin or bar, in Australia.
3.1 Where is the Metal? All gold and silver will be held by the Custodian at its London vault premises. ... The Custodian will be responsible for the transportation, handling and any costs associated with moving Bullion to or from its London vault premises and between any vaults of sub-custodians. As at the date of this Prospectus the Sub-Custodians directly appointed by the Custodian are the Bank of England, The Bank of Nova Scotia (ScotiaMocatta), Deutsche Bank AG, JPMorgan Chase Bank, N.A., UBS AG, Barclays Bank PLC, Johnson Matthey plc, Brink's Global Services Inc. and ViaMat International.
Comment: That's a lot of people holding your gold and silver, providing lots of finger pointing opportunities if things go bad.
3.2 Storage and Insurance of Metal. The Custodian (or one of its affiliates) may make such insurance arrangements from time to time in connection with its custodial obligations with respect to Bullion held in allocated form as it considers appropriate. The Custodian has no obligation to insure such Bullion against loss, theft or damage and the Issuer does not intend to insure against such risks. In addition, the Trustee is not responsible for ensuring that adequate insurance arrangements have been made, or for insuring the Bullion held in the Metal Accounts, and shall not be required to make any enquiry regarding such matters.
and
5.5 Custody and Insurance. Accordingly, there is a risk that some or all of the Bullion could be lost, stolen or damaged and the Issuer would not be able to satisfy its obligations in respect of the Metal Securities.
Comment: I find this an incredible statement. The custodian does not have to insure it, we don't intend to insure it and the trustee is not responsible for ensuring it is insured. What sort of custodianship is this? What a great business - give me your gold and if it gets stolen, that's your problem, just trust me I'm doing a good job.
5.6 Early Redemption of Metal Securities. The Company may, at any time, upon not less than 30 days’ notice by an announcement through the CAP to the Holders, redeem all Metal Securities of a particular type.
Comment: Now I don't think anyone would expect that an issuer of a product must be duty bound to continue to offer the product or service forever and ever. But 30 days, that's not much time for the investor to get out in an orderly manner. You may be forced to take a capital profit or loss when it does not suit you. Note also you must take cash, unless you have a London metal account.
Compare that to the "escape" clause that the Perth Mint put into ZAUWBA, which can only come into effect if we hold less than 100,000oz in the warrant and we have to give 6 month's notice (clause 12.1(e)). At least you have some time to arrange physical collection or sell at a price advantageous to you. Why couldn't ETF Securities offer the same sort of breathing space.
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