South Africa's NewGold ETF runs with gold

Absa Capital’s Vladimir Nedeljkovic says South African NewGold ETF is as liquid as underlying spot market and an ideal institutional investment tool.

JOHANNESBURG - 

South Africa's NewGold Exchange Traded Fund (ETF) has exceeded R5.1billion (US$740 million) in assets under management of Absa Capital as investors believe the gold price will continue its bull run.  

Vladimir Nedeljkovic, Absa head of ETFs and index products, said the NewGold ETF appealed to investors as it was an open-ended, extremely liquid investment instrument.   

He explained that the ETF was as liquid as the underlying gold spot market, which implied that investors always received prices correlating with the gold price. There were no discounts or premiums on units sold or bought in the ETF.  

The gold ETF was an ideal investment tool for institutional investors who traded large positions as "anything" could be done through the fund that only needed physical metal, according to Nedeljkovic.  

The NewGold ETF sold physical gold and units and bought physical gold and created new units on demand as the gold spot market was very deep, he added.

The South African ETF performed among the best in the world if one considered the size of the various capital markets. This came as local investors were accustomed to gold and was limited by legislation to only invest in gold in the country. South Africans were prohibited to hold physical gold so their only options to gain exposure to the metal was to invest in either illiquid Krugerrands - a South African gold coin - or the gold ETF.  

"Internationally, a lot of gold ETFs are used for speculation. However, most of our ETF trade amounts to buying and holding." Nedeljkovic added the fund has only seen a single redemption since it was established in 2004. The fund was launched with assets under management of just under R250 million (US$36.2m). In 2007, it increased its gold holdings two and a half times from 10.25 tons to 25.93 tons and its assets under management three and a half times from R1.46 billion (US$211 million) to R5.1 billion (US$740 million).

Looking forward, Nedeljkovic said the fund's growth in 2008 depended on whether the gold price would continue its rise. Other reasons for investing in the fund was the relative return the metal offered compared to other assets, diversification and inflation protection.  

He said that even in times of zero growth in gold - 5-10% of a portfolio holding should be in gold for diversification purposes. Gold acts as a shield against inflation and it has in fact been one of the assets to protect wealth since the Middle Ages.

Nedeljkovic said every country typically only had one listed ETF, with the exception of the United States. He did not anticipate the launch of more gold ETFs in South Africa, but rather the introduction of other commodity ETFs. 

Investors buy and sell gold ETF shares through a standard stock broking account and do not need to take physical delivery of the metal.  When an investor wants to buy into the trust, fresh shares (units) are created and the appropriate amount of gold is bought from the market to back those shares. 

The gold is allocated, which means that each bar is segregated in the custodian's vault with its number recorded; furthermore the metal cannot be lent into the open market. 

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