Now that's security: Vaults managed by Morgan Chase

Gold-Backed ETF Enters Fray in U.S.

By Carolyn Cui
The Wall Street Journal
Tuesday, September 8, 2009

http://online.wsj.com/article/SB125244708801293755.html

With gold briefly touching $1,000 a troy ounce, a new bullion-backed exchange-traded fund is entering the U.S. market to capitalize on demand from investors wanting to hold a piece of the precious metal.

The ETFS Physical Swiss Gold Shares will start trading on the New York Stock Exchange's Arca platform on Wednesday. It will be the third gold-backed ETF in the U.S. The fund will track spot gold prices by backing each share issued with one-tenth of an ounce of physical bullion stored in Switzerland.

Concerns over a stock-market pullback and a weakening dollar have sent prices soaring of precious metals and the investments that track them. Gold also is profiting from a flight into hard assets amid inflationary fears, as central banks have pumped billions of dollars into economies to revive growth. Investors have flocked to ETFs backed with the physical metal.

Some other gold ETFs use futures contracts, in which there could be counterparty risk if someone fails to honor the contract.

Globally, gold ETF holdings have surged 42%, or 16 million ounces, since the beginning of 2009, according to UBS. The ETFs now hold a total of 54.23 million ounces of gold, close to last year's total world production.

Partly due to the increase in ETF demand, gold prices hit a six-month high Tuesday and settled at $997.90 a troy ounce, up $3, or 0.3%, on the Comex division of the New York Mercantile Exchange. It hit $1,006.90 during the trading session, exceeding gold's record close of $1,003.20 hit in March 2008.

The interest toward physical-commodity ETFs also reflects increased scrutiny by commodity regulators in the U.S. of the heavily leveraged ETFs that hold commodity futures. Regulators worry that excessive speculation might distort commodity prices. ETFs that hold actual gold and silver bars aren't part of this debate.

The new product marks the latest charge into the U.S. market by ETF Securities, the London commodity ETF provider. In July, the company launched a silver-backed ETF and quickly increased its assets to more than $130 million.

However, it will face competition in the U.S. gold market, which is dominated by the $34.7 billion SPDR Gold Shares, sponsored by the World Gold Council, along with iShares Comex Gold Trust, a $2.4 billion fund that BlackRock recently acquired as part of its Barclays Global Investors deal. The new fund offers a slightly lower expense ratio of 0.39% than its U.S. rivals, both running at 0.4%.

The fund is designed to cater to gold buyers who want to guard against extreme situations. The British company will hold its gold in Switzerland, which is "probably one of the most independent countries in terms of political influence," said William Rhind, head of sales and marketing for ETFS Marketing, the marketing arm for ETF Securities.

The vast majority of gold is stored in London and the U.S. SPDR Gold Shares, the world's largest gold fund, has all its bars stored with HSBC Holdings in London. The new fund will store its metals in Zurich in vaults managed by J.P. Morgan Chase.

"With regards of terrorism, war and all sorts of extreme events, the feeling is that Switzerland is probably the safest venue to store gold," Mr. Rhind said. Gold holdings in Switzerland have increased in the past 18 months, leading some vault-service providers to scramble for storage space, he said.

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