Investec launches dollar Gold ETN to South African investors
South African investors wanting to cut out the currency volatility from their gold exposure can now do so with one product.
Posted: Thursday , 18 Oct 2012
JOHANNESBURG (Mineweb) -
Investec has launched a gold exchange traded note (ETN) to exploit what it sees as a gap in the market for investors who want gold dollar price exposure but not necessarily paired with the Rand/dollar exchange rate fluctuations.
The pure gold play ETN will track the percentage move in the dollar gold price to a Rand investment at a tenth of the price. An example of this would be if the gold price was $1740 per ounce then the ETN would trade at R174 and if the gold price moved to $1780 then the ETN would increase to around R178.
Investec is hoping to lure away investors from one of the most successful exchange traded funds in the market, Absa's NewGold exchange traded fund (ETF), which tracks the Rand price of gold.
Brian McMillan at Investec structured products said that the new ETN would remove the need for investors who bought the NewGold ETF from having to buy a separate hedge to eliminate the currency fluctuations.
The correlation between the gold price and the gold ETN to be called "GOLDEN" on the JSE is expected to be around 97% on a daily basis increasing to 100% over the longer term said Investec due to the costs that Investec incurred in hedging its Rand exposure.
The costs of approximately 3.2% per annum to be incurred by Investec to hedge the Rand exposure will be set off against interest earned on funds invested said Quentin Allison from Investec's capital markets division.
At current rates the net surplus of 1% would then be returned to investors explained Allison but this will be subject to rate fluctuations so if interest rates fall below the 3.2% hedging costs then customers would be charged the difference.
In terms of administrative costs no annual fees are payable on the Investec gold ETN's which is in contrast to the fees of 0.4% per annum normally charged on the capital invested in commodity notes. Normal brokerage fees would be applicable for purchases via a stockbroker.
The product has a five year maturity and will carry foreign asset status so will have to be included when complying with offshore investment limits for institutions.
McMillan said hedge funds would specifically be targeted as it assisted them in not having to trade across products.
The argument for launching the product said Investec was the traditionally negative correlation between the Rand and the gold price.
Historically, over the last three years and based on 30 day rolling returns, Investec has pegged the negative correlation between the Rand and gold price at an average of -41%.
This means if the gold dollar price increases then the Rand has a tendency to strengthen negating some of the profits that could have been made if it was a direct dollar based investment.
Warren Ingram, an executive director with wealth management firm, Galileo Capital, said that South African investors love getting into gold but warned that there would be no dividend flows from the ETNs in comparison to the gold equities.
Ingram also warned against sharp falls in the gold price and advised that wealthy individuals should restrict their commodity exposures to between 3% and 5% of their total portfolios.
"Rather buy the mining houses like the BHP's and Anglo's, they are so massively diversified across geographies and commodities and both have done a good job thus far over the long term" said Ingram.
Another thing to bear in mind is that investors in ETFs are not exposed to any credit risk as their investments are backed by the underlying assets whereas ETNs are notes issued by a bank and backed by the strength of, in this case, Investec's balance sheet.
To counter this, the current mine strife is expected to shrink margins on wage increases and the upgrading of housing and other socio-economic programs. This means lower dividends for shareholders.
Not to mention the growing trend of resource nationalism, policy and tax uncertainty, along with the printing of more money in terms of open-ended quantitative easing programs which may sway investor sentiment towards the metal.