Latest on war's toll, tradeable gold

By Thom Calandra           March 28, 2003 cbs.marketwatch.com

Some wonder if Syria will play part in Iraq

Is it gold or gold paper?

Investors will want to know if the World Gold Council will participate in the development of gold funds similar to the one that debuted this week in Australia.

The open-end fund trades like a stock on the Australian Stock Exchange. Because it is backed by real gold stored in a London vault and trades in real time, the down-under product, called Gold Bullion Securities (GOLD), may be the first exchange-traded fund of a commodity.

Each share of the new fund, which began trading Friday, is entitled to one tenth of one fine troy ounce of gold. I asked Simon Village, an executive at the World Gold Council in London, about further plans for exchange-traded gold funds at other locations.

Village is one of several new executives at the gold council who have been working with securities dealers, asset managers and gold-storage companies to develop gold investing instruments. The former HSBC global mining researcher is working with Stuart Thomas, a former Morgan Stanley equity sales director, and the council's chairman, Chris Thompson of South African miner Gold Fields Ltd. (GFI).

Village, the council's managing director of investment services, on Friday would only tell me from London, "Unfortunately, I cannot comment. But given our mandate as a commercially focused organization representing the marketing arm of the significant gold producers, it is our objective to increase and broaden the use of gold in all its forms."

Several mining professionals tell me the gold council is working feverishly with North American regulators in an effort to start a gold exchange-traded fund, managed by one of the large index asset management firms, among them State Street Advisors or Barclays Global Investors.

The gold industry has long lamented - and done little about - the difficult path individuals must travel in order to buy gold for investment purposes. The new Australian fund is a joint initiative of the World Gold Council and Investor Resources Ltd., which created a new Australian company called Gold Bullion Ltd. The Australia Gold Council also played a part. See: Gold security down under.

Nik Bienkowski, Gold Bullion's head of institutional investment, tells me he is aware of no other securitized gold product "being rolled out anywhere else at the moment."

There are several efforts to launch a gold ETF that would trade like the Nasdaq 100 Trust's QQQs or the S&P 500's Spyders. One of them under development involves GoldMoney.com, a transaction service that is investigating such a security for a Canada listing. The World Gold Council is also pursuing such a product, for possible listing in the United States.

The Australian product on Friday traded securities that amounted to only 730 or so ounces, at a price that was just less than 1 percent greater than the spot gold price. Exchange-traded funds are seen as a way of increasing physical demand for gold, especially during rocky fiscal and geopolitical times.

The Australian product actually loses a miniscule amount of its "gold backing" each trading day in the way of a 0.02 percent daily management fee. The gold is sold to pay the fee. Bienkowski said it will take four years for the daily erosion of the gold backing to reach 1 percent of each share.

"Over 4.2 years, the total fee will amount to 1 percent," he says from Australia. "For a $55 Australian (or U.S.$33) security, the means the price would fall to $54.45 (or U.S. $32.67), assuming the gold price stayed constant over the 4 years." See: More on Australian gold product.

At that point, the investment director said the management firm "may recapitalize the shares to 1/10th of one ounce, once it falls to a 99 percent backing." Whether such a structure confuses mainstream investors, who already are hesitant to buy gold, remains to be seen.

"We have structured this product to be as low cost as possible," Bienkowski said. "You would have to admit that the fees appear cheap, and if the average investor wanted to purchase spot gold bullion, it would cost a 2 percent to 5 percent premium, and then they would have to arrange storage, insurance and transport."

Syria's role in war

Syria may be willing to play a part in the Iraq conflict, one that may challenge the United States and alarm financial markets. Military intelligence and market research service Stratfor.com says the Middle Eastern nation is willing to make waves.

"Syria has demonstrated strange behavior and an aggressively anti-war stance in recent days -- with officials taking pot shots at Egypt and allegedly allowing busloads of Syrians to head to Iraq to fight against U.S. and British forces," Stratfor, a subscription service headed by author and analyst George Friedman, says. "The country's most senior mufti called for suicide strikes against allied forces in Iraq, and Syrian President Bashar Assad said in an interview with a Lebanese daily that the country would not wait until it becomes the next U.S. target."

Stratfor acknowledges there is "no evidence to suggest that the Syrian military is about to get involved in the fight in Iraq."

Texas-based fund manager and financial author Joseph Duarte, who tracks Stratfor and other market intelligence services, says the media is ignoring the Syria development, preferring to focus instead on less important matters regarding the Iraq war.

"The major media is focusing on the potential negative sentiment against Defense Secretary Donald Rumsfeld, and in doing so is once again missing a significant set of dynamics which could have devastating effects on the war and global markets," Duarte, of River Willow Capital Management, says from Dallas. "The U.S. is on the verge of facing a major set of potential problems and needs to move its timetable forward on this war and secure Baghdad as soon as possible."

The author of "Successful Energy Sector Investing" tells me Friday that the prospect of a long war introduces scenarios such as Syria that investors have yet to factor into the rally that moved stocks, and the dollar, higher in the conflict's early going.

"If Syria is starting to stealth its way into the war on the side of Iraq, and al-Qaeda is fighting alongside the Iraqi irregulars as reports seem to indicate, this has the potential to cause major problems for the U.S. and the markets," Duarte says.

"An attack on Israel is a rising possibility. And the U.S. might be forced to use weapons that it had not intended to use, if indeed the worst-case scenario unfolds. The U.S. needs to move fast and end any doubt on who's going to win this war, or the problems it will face will be disastrous.

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