#ETFscorecard: ETFS Physical Swiss Gold Shares (nyse: SGOL)

SGOL is a commodity fund that owns gold bullion.  It differs from other gold sector ETFs that invest in mining firms or gold futures.  The following profile shows that SGOL is a relatively new, but wealthy, fund that does not distribute cash dividends to investors.

SGOLprofile

The SGOL scorecard reveals several negative features: 1) inexperienced operation, less than 5 years; 2) increased tax burden; 3) no cash distributions; 4) gold bullion is susceptible to theft; and, 4) volatile share price.  The positive features are: 1) Fund operations are supported by plenty of wealth; and, 2) Fund shares can be held in a tax deferred account.

SGOLscorecard

Fund operations

The Trust does not insure its holdings of gold.  Rather, the custodian (JP Morgan Chase Bank NA) maintains insurance for its business, bullion holdings, and all bullion held by subcustodians.  One subcustodian is a Zurich bank that stores the gold bullion in a vault.  The gold vault is inspected twice a year, one scheduled and one randomly chosen by the sponsor.

Shareholders have limited recourse against the trust and custodians.  One of the Risk factors is that the custodian might not have sufficient insurance to cover any liability for the loss of gold holdings.

Gold price

Reference prices for gold trading are fixed in London at 10:30 am and 3:00 pm by 5 participating banks, all members of the London Bullion Market Association (LBMA).  The LBMA is an international trade group representing the wholesale market for gold and silver.  The price of Gold is determined by auction in the global market, which in turn is influenced by

  1. speculator attitude
  2. central banks  (announcements and gold-trading activity)
  3. political news
  4. economic news
  5. other forces of supply (e.g., mine production) and demand (e.g., gold futures investors).

Gold market1

Gold is traded in the over-the-counter spot market (physical gold) and derivatives markets.  The main physical gold markets are in London and Zurich.

The participants are miners, bullion bankers, central banks of gold-holding countries, investors, and manufacturers.  The average 5-year production of gold is 4,000 tons per year.  About 20% of the above-ground gold is held by central banks (including the Federal Reserve Bank of New York).  The demand for gold is high among jewelers and investors (especially ETFs).

INVESTMENT STRATEGY

The investor’s only source of income is from personal capital gains.  The gold price is cyclic as shown by the following chart1 .

GoldPrice

Reference

  1. Rob Curran.  Does a Big ETF Drive Gold’s Price? Some pros cite sales by SPDR Gold for the metal’s 2013 decline. JOURNAL REPORT: WEALTH MANAGEMENT, The Wall Street Journal, May 5, 2013.
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