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Dollar damage

Created:
18 September 2007
Written by:
Daniel O'Sullivan

An alternative to buying shares in gold companies is to invest in the metal itself. And for private investors without anywhere to store bars of bullion, several exchange-traded funds (ETF) offer exposure to the price of the yellow metal and can be traded as easily as a normal company share.

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Gold ETFs are now a worldwide phenomenon and three currently exist on the London Stock Exchange. LyxOR Gold Bullion Securities (ticker: GBS) and ETF Securities Physical Gold (PHAU) grant investors a direct stake in physical gold held in HSBC vaults. The essential difference between them, as far as private investors are concerned, is that when GBS was launched a few years ago, it was structured to allow holdings to be converted into actual bullion. This was enough to render it ineligible for the tax-sheltering advantages of an individual savings account (Isa). The recently-launched PHAU has tweaked these same redemption rights, so that it is eligible for an Isa.

The third instrument, called ETF Securities Gold (BULL) can also be put in an Isa. However, rather than offering exposure to bullion, it tracks a rolling series of near-term futures contracts for gold on the COMEX exchange in the US. Technically, its valuation is more complicated than that of physically-based ETFs. That said, the gold price is the largest single influence on the value of these one- to three-month futures at any one time.

The rub is that all three of the above instruments are denominated in US dollars. And in as much as a falling US dollar has been a key component in gold's recent rise, to the same extent UK-based holders have failed to benefit. For example, from the start of its most recent upward leg on August 17 until the time of writing, gold has risen 7.9 per cent, from $656.75 to $708.6 per ounce. Through the same period, in US dollar terms, GBS has risen 8 per cent, PHAU has risen 8.2 per cent and BULL has risen 7.7 per cent. But in the same period, the dollar versus sterling has weakened from $1.98 to $2.03.

So, for UK investors, actual gains adjusted for the currency movement are more like 5.3, 5.6 and 5.3 per cent respectively. Not to be sniffed at, certainly - but the dollar denomination is definitely biting.

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