ETFS Physical Gold PHAU – Published 10/04/18

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The gold price has been taking a backseat recently partly because of huge coverage of bitcoin. But this precious metal has continued to be a safe haven store of value in troubled times. There are many ETFs offering trades in physical gold – an ETF is an exchange-traded fund, often characterised by low commissions, and operating in a similar fashion to an index fund.

In the past people bought krugerrands or sovereigns as literal physical gold. But gold coins came with all the problems of keeping the gold securely. The only other way of getting exposure to the gold price was via gold futures.

Now, people can buy into the gold price and its movements through physical gold ETFs. The price tracked is usually the gold spot price and the fund is backed by at least a proportion of physical gold, held in a bank vault, with each gold bar allocated and identified individually. The fund reflects between 1% and 10% of gold’s full price. How do you know if the gold is of the correct carat and value? The London Bullion Market Association (LBMA) issues rules and the custodians (the banks) only accept LBMA certified gold.

No dividends but there are management fees

The ETFs charge a management fee, because there are obviously costs associated with storing the gold. Given that there is no dividend yield on physical gold, you need to be confident that the price will rise enough to offset both the loss of dividend and the management fees. Although it has to be noted, that buying physical gold coins and then selling them again to a dealer, generates much higher fees than the 0.2% to 0.5% or so charged by many ETFs.

Of course, over the centuries gold has been a brilliant performer which is why people continue to put their trust in it. It performs exceptionally well in times of inflation, as people see paper money and traditional savings losing value.

ETFs leverage their gold holdings

ETFs that trade gold are usually set up as a trust. The ETF then issues shares, with a set amount of physical gold being held for each share. When you buy shares in the ETF you are buying a share of the gold. For example, the SPDR gold trust (GLD) is one of the biggest gold ETFs and trades about ten million shares every day. The fund states that each share is equivalent to 0.0955599 ounces of gold.

Another of the largest ETFs is the iShares Gold Trust (IAU) which trades about 8 million shares each day. This trades at about 1% of the price of physical gold. It too, holds physical gold and like SPDR, is structured as a trust, with about 0.25% being charged as expenses.

Funds that are backed by physical gold can produce tracking errors. When considering a fund, look for a low level of tracking error because the fund should ideally be trading closely in line with the gold price.

Gold price

Looking at the gold price over time is a bit like reading a history book – financial crises, wars and inflationary spirals cause spikes in the price. From a low of around £500 per ounce before the financial crisis, the gold price peaked in 2012 at nearly £1200 as the full implications sank in and investors sought a safe refuge. It’s currently round about £950 but it was as high as £1030 in September 2017. So to be a gold investor, you have to be comfortable with a high degree of volatility.