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FOCUS: Proposed Van Eck Gold, Silver ETFs Would Allow Redemptions Of Metal

By Allen Sykora of Kitco News
Tuesday March 12, 2013 2:50 PM

(Kitco News) - Van Eck Global, which already offers several high-profile precious metals-related investments, is looking to add two more – gold and silver exchange-traded funds in which investors have the option of taking their redemptions in physical metal rather than only cash.

The company made Securities and Exchange Commission filings seeking approval for the two new ETFs last week.

Van Eck officials cannot do interviews or comment on their own plans due to a “quiet period” mandated by the SEC while the government does its review. Several analysts told Kitco News that it appears the main factor differentiating this planned product from the majority of the existing ETFs in North America is the ability of investors to get their hands on physical gold or silver whenever they choose to exit, although they could also cash out. They also envision that large investors are likely to be the main ones taking physical delivery.

“It’s really for people who are worried about their gold and really want to have that option -- to know that if they need to turn in their shares and hold the gold, they can,” said Carolyn Hill, an ETF specialist with IndexUniverse.

Many investors turn to gold to begin with because they do not want to hold paper currencies, said Christian Magoon, publisher of the Web site GoldETFs.biz. Thus, there might be times when they are reluctant to take paper currency when exiting their gold investment.

“The end result (of taking physical metal) might be more preferential to getting paper-currency proceeds,” he said.

Since 1956, Van Eck has offered a mutual fund that holds gold-mining shares -- the Van Eck International Investors Gold Fund (INIVX). According to Morningstar, this fund had assets under management of $976.6 million as of Monday.

In recent years, the company has also offered a couple of exchange-traded funds that hold shares of mining companies--the Market Vectors Gold Miners ETF (GDX), which has $7.33 billion in assets under management; and the Junior Gold Miners ETF (GDXJ), which has assets totaling $2.24 billion.

The two new proposed products are the Market Vectors Redeemable Gold Trust and the Market Vectors Redeemable Silver Trust. Both would trade on NYSE Arca.

ETFs became a popular way for investors to gain exposure to the precious metals in nearly a decade since the first gold ETF was introduced. They trade like a stock but track the price of the commodity, with metal put into storage to back the shares.

Despite net withdrawals so far in 2013 as many investors turned to the surging stock market, global gold holdings in the ETFs tracked by BNP Paribas stood at 2,592.9 metric tons as of the end of February. To put that into perspective, the World Gold Council’s most recent quarterly supply/demand listed world gold-mine production in 2012 at 2,847.7 tons.

Van Eck’s filings with the SEC said the primary objective of the trusts is for the shares to reflect the performance of the price of gold or silver minus the expenses of running the ETFs. This is typical of the many physically backed ETFs already in existence for gold, silver and platinum group metals.

However, the gold trust filing says a “secondary objective is to provide investors with an opportunity to invest in gold through the shares and to be able to take delivery of gold bullion in exchange for their shares.” The filing for the silver trust includes the same language for taking delivery of silver. This is different from most ETFs, in which investors gain exposure to the price of a metal but do not take actual physical delivery.

“I like the concept,” said Jeff Clark, senior precious-metals analyst with Casey Research.

He suggested such a product might be most beneficial for large or institutional investors who might be worried about whether they would be able to gain access to physical bullion on the open market in a time of a crisis and thus high demand.

Otherwise, smaller investors who know they definitely want physical metal to begin with may be able to do so less expensively elsewhere, Clark said. Still, this would be a secondary way to gain physical exposure. Further, Hill said, an investor would have to own enough shares to amount to a full bar for delivery.

Clark characterized such as product as “healthy” for the metals market in general.

“At a minimum, it’s more competition for the marketplace, which is a good thing,” Clark said. It might also help bump up overall ETF demand. “I think it could bring more exposure to the industry. This is definitely the direction the industry is going – toward more physical ownership as opposed to holding a paper product, even though the paper is fully backed by metal.”

David Morgan, independent precious-metals analyst with Silver-Investor.com, also endorsed the concept.

“The advantage is they’re backing it with physical metal,” he said. Other ETFs do as well, yet some in the market have worried about whether there might be other unknown commitments on the metal, such as collateral or leases. As a result, Morgan said, in times of bull markets for the metals, the few other similar ETFs in existence have traded at a premium to other metal ETFs.

“Those are superior to many investors because they know the metal is there because they have the option of taking the metal home, if they wish,” Morgan said.

Magoon suggested such deliverable ETFs might seem logical to an investor torn on whether to take on the costs of storing physical metal, such as insurance and storage. They would at least have the option of exiting the ETF and taking on storage at a later date.

When choosing to take delivery, ETF filings said, the number of shares must correspond in value to the “fine ounce” content of the bars requested and have a minimum dollar value in an amount specified by the sponsor the trust’s Website.

The filing cautioned, however, that delivery of gold and silver bars to applicants “may take time” due to a number of factors, such as type of bars, delivery method chosen and whether deliveries are made in multiple smaller shipments.  Delays potentially could result in losses if the prices of gold or silver decline, the filings say.

The Van Eck filings can be seen on the SEC’s Web site under the following links:

http://www.sec.gov/Archives/edgar/data/1570765/000093041313001409/c72893_s1.htm

http://www.sec.gov/Archives/edgar/data/1570770/000093041313001408/c72928_s1.htm

 

By Allen Sykora of Kitco News; asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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