While bankers are going through hoops to sell structured financial products to retail investors, UK private investors can now buy one of the oldest and simplest commodities in the world – gold.
On December 9, Gold Bullion Securities launched its gold-backed securities (GBS), listed and traded on the London Stock Exchange.
Gold Bullion Securities is two-thirds owned by the World Gold Council, a trade association through which the world's leading gold producers promote investment in the yellow metal.
A gold-backed security is essentially a receipt giving individuals an entitlement to physical gold. Primary market makers – approved banks or brokers – apply to buy gold-backed notes from Gold Bullion Securities. These notes represent gold that the applicant has bought in the market and deposited on trust with HSBC, which is one of the London Bullion Market Association's clearing banks. Each note represents one-tenth of an ounce of gold bullion. The applicant can sell notes to private investors, who can then trade them in the secondary market.
"The note has nominal value, and is really just a method of buying and selling the trust interest," says Chris Hogan, a partner at Baker & McKenzie, Gold Bullion Securities' legal adviser. "We wanted to keep it as simple as possible."
Gold-backed securities let private investors buy gold without the cost and inconvenience of actually taking possession of the metal. While the bullion market was an over-the-counter, physical market, it was inconvenient for private investors and even off limits to some funds, which weren't allowed to trade on the physical markets because of custodian issues.
Gold-backed securities are open-ended. If investors want more, brokers simply deposit more gold and more notes are issued in their name. Notes are redeemable at any time, so investors aren't locked into the market if there is a liquidity crunch. But with the notes 100% backed by allocated gold, and London the most liquid of the world's gold markets, that is less of a threat.
"We've underpinned the product with bullion," says Gold Bullion Securities MD Simon Village. "The gold that the notes represent actually sits in HSBC in 400-ounce bars."
Just four working days after gold-backed securities were launched in London, 632,796 ounces of gold, representing 6.3 million new shares, had been deposited.
London is the second stock exchange to list gold-backed securities. It follows the success of a similar product launched on the Australian Stock Exchange by Gold Bullion, a sister company of Gold Bullion Securities, in March last year.
"Australia was a bit of a test case," says Village. "We've got about 8 tonnes of gold under the trust in Australia, and about 20 tonnes in London now. That's quite significant for a start-up."
Private investors can already buy gold in the form of gold coins such as Krugerrands. But these are not ideal. "There's no liquidity in Krugerrands and they are much more expensive," says Village. "With these notes, the whole physical process is done for you.
"We want to roll this out globally and allow every investor category to access gold in an efficient way," he adds. "We want them to be able to pick up the phone, call their broker, and buy gold."
With prices hitting $400 an ounce at the end of 2003, gold is living up to its reputation as the natural hedge in investors' portfolios to both equities and the dollar.
"For pure diversification purposes, an average investor should have some commodities like gold in their portfolio," says John Butler, head of debt strategy at Dresdner Kleinwort Wasserstein. "Normally it costs a lot to achieve diversification through commodities because they don't pay interest. But while interest rates are so low anyway, that is less of a factor."