Gold exchange traded funds (ETF = exchange traded funds) are investment schemes whose shares are traded on regulated stock markets. Imagine a group of investors and investment managers who raise funds and buy certain types of assets. These assets can be stocks, bonds, commodities, real estate and more.
The next step is to create a fund to put the shares on the market. They are listed on regulated stock markets and can be purchased by any individual investor, but also by public companies – such as Coca Cola, Microsoft, etc. The main difference between gold exchange-traded funds and mutual funds is the share price, which is traded constantly throughout the day. Unlike corporate shares, exchange-traded gold fund shares include commissions and management expenses depending on the fund structure.
The share price of exchange-traded funds should change almost entirely with the movement of international asset prices in the fund.
The main role in the process of creating and buying shares of exchange-traded funds is played by the so-called authorized participants. These are registered broker-dealers who can request a fixed number of newly created shares of the exchange-traded fund in exchange for a basket of assets that corresponds to the stocks in the fund. In the primary market, requests to increase the total number of shares are in block accounts of 50, 75, 100, 200 thousand, which are called newly created units.
Authorized intermediaries can hold new shares of exchange-traded gold funds or sell them to investors on the secondary stock market. Retail investors cannot buy shares directly from the fund (ETF sponsor).
The exchange is done “in kind”, that is, exchange of securities or assets without the use of money. The purchase process is a mirror, when authorized intermediaries wish to sell the shares held by the fund and receive the basket of assets.
Difference Between Gold Exchange Traded Funds And Mutual Funds
In the gold exchange traded fund market we have a very different trading structure. As already shown, investors are isolated from each other and participate in the secondary market. The main transaction is carried out by authorized intermediaries on the basis of “in kind” exchange.
As expected, exchange-traded gold funds have different structures. There are 2 main types:
Gold Exchanges Trading Funds That Invest In Physical Gold
The largest exchange-traded fund ($57.7 billion as of mid -September 2021) backed by physical gold is SPDR Gold Shares (GLD). The fund has 2 types of assets – gold bullion of approximately 400 ounces (good delivery gold bullion of the London Bullion Market Association) and cash . The gold is stored in an HSBC vault in London. The share price is formed by the movement of the gold price on the international markets (LBMA Gold Price) minus the management costs of the fund.
Depending on daily traded stock volumes, GLD must buy or sell gold to maintain the mirror movement of the stock price and spot gold price. Authorized intermediaries, who provide the necessary liquidity, play an active role in conducting sales. This includes Citi, Goldman Sachs, Morgan Stanley, JPMorgan Chase and Bank of America Merrill Lynch. They enter into an agreement with the fund, which allows them to deposit gold or shares for further trading until the end of the fund’s operation.
The price structure of GLD per share is 1/10 of the spot price of gold. Many investors are misled into thinking that a purchased share is a claim for 1/10th of an ounce of physical gold, which they can eventually claim. It’s not necessary. The Fund makes no commitment to convert shares into physical gold.
Synthetic Exchange Traded Funds
The other main type of exchange-traded gold funds are those that do not invest in physical gold, but hedge their equity issuance with futures and options. Such funds are often called synthetic. In most cases, the futures and options contracts they use are without the actual delivery of physical gold. Upon reaching the “delivery” date, they continue to be in effect or go through financial settlement.
