What is a Gold ETF?
A gold exchange-traded fund (ETF) is a commodity ETF that consists of only one principal asset: gold. ETFs are similar to individual stocks and trade on exchanges in the same manner. The main aspect that complicates gold ETFs more than traditional stocks is the derivative underlying the investment. A derivative is a “contract between two or more parties whose value is based on an agreed-upon underlying financial asset.” An example of an underlying asset would be a security or commodity. Gold ETFs hold gold derivative contracts that are backed by gold. So when someone invests in a gold ETF, they don’t actually own any of the gold, instead, they are purchasing a share that represents the physical gold. In addition, most ETFs, upon redemption, do not pay out by providing the precious metal; they instead provide an investor with a cash equivalent. The goal of an ETF is to give an investor exposure to the price movements and/or performance of gold.
Examples of Gold ETFs and How Redemption Works
GLD – SPDR Gold Trust ETF
This is the world’s largest gold ETF. Each GLD share represents 0.095599 ounces of gold and trades at roughly $144 a share. Redemption of the physical gold is usually not available to the average investor. Only “Authorized Participants” (AP) are allowed to redeem shares. More on what AP’s are can be found here. In addition, an AP can only request delivery of the actual gold if they own a minimum of 100,000 shares. Today, 100,000 shares is worth about $14,400,000. While the delivery of physical gold is possible, it is out of reach for most investors.
Other gold ETFs include: (1) IAU – iShares COMEX Gold Trust ETF, and (2) DGL – PowerShares DB Gold ETF. Each IAU share represents .0097 ounces of gold and trades at roughly $14 a share. Similarly to GLD, only an AP may redeem the gold. To redeem physical gold, an AP must own a minimum of 50,000 shares (called a “Basket”). With today’s prices, a 50,000 basket is about $700,000. The DGL ETF (as well as its redemption process) is similar to the above two.
Expenses Related With Gold ETFs (how are these companies profitable)
Gold ETFs typically have two associated costs. The first is the “Expense Ratio.” The expense ratio covers the fund’s total annual operating expenses and shareholders contribute to cover the cost. On average, gold ETFs have an expense ratio of 0.8%. SPDR Gold Trust charges .40% per year, while iShares charges .25%. (more examples can be seen in the chart below).
The second expense associated with an ETF is the actual costs of each trade. These fees are present each time an investor buys or sells shares, but are usually below $10 a trade.
What is a Gold-Backed Cryptocurrency?
The basic concept for gold-backed crypto is easily understood. A company issues a token or coin that represents a certain value of gold. For instance, 1 gram of gold can represent 1 coin. The gold is stored by a trusted custodian or third party and can be traded on the market or with other holders.
Is There a Meaningful Role for Gold-Backed Cryptocurrencies?
Let’s first consider why there is a meaningful role for the tokenization of gold. Many people do not buy securities. In the U.S for instance, more than 50% of Americans do not invest in stocks, mutual funds, ETFs or any securities in general. In addition, more than half of those individuals who do not invest because they do not have the monetary means to do so. With a gold-backed token, potential investors need only a fraction of a dollar to potentially invest.
Second, buying and selling gold ETFs is difficult for those living in markets where there are no ETFs. There are many hoops a potential retail investor must jump through to benefit from investing in a Gold ETF in this scenario. For instance, the investor must open a trading account and have the appropriate security measures run, such as KYC. Then they must transfer funds into their trading account and convert their currency into a foreign currency. The process goes on and on and each step takes at least one day to complete, with various fees, costs, and commissions.
Tokenizing gold also provides a way to make gold a medium of exchange again. Currently, transporting heavy quantities of gold and dividing gold bars into smaller denominations is very difficult. By tokenizing gold, people are able to divide up gold bars into smaller denominations and allow for the use of gold that just sits in vaults worldwide.
Other benefits of tokenizing gold include: (1) no territorial barriers for any investor;(2) no middlemen involved; no third-party brokers or stock-trading accounts are needed. (3) Greater liquidity through fractional ownership; and (4) easily accessible: anyone can access tokens from anywhere, 24/7 through their phones or other devices.
Examples of Companies Tokenizing Gold and How Redemption Works
There are many companies creating gold-backed cryptocurrencies. The most well-known is DigixGlobal. DigixGlobal created a token called Digix Gold Token (DGX). Each token represents 1 gram of gold and each DGX token is currently trading at $49.11 on the open market. Other examples of gold-backed cryptocurrencies include: AurumCoin (each coin is backed by .75 grams of gold), Blocknote (each coin is backed by .01 grams of gold), and Orocrypt (each token is backed by 30 grams of gold).
Tokenizing gold is still a rather recent phenomenon, and so many companies do not allow physical redemption of the gold backing the tokens yet. Some companies in further development are paving the way for this process. DigixGlobal allows for redemption at any time. The steps to do so can be found here. Investors basically have to fill out a few forms and physically appear at the vault within a certain period to redeem the gold. This may be slightly complicated for many though, seeing as how the vault is in Singapore.
XGold also allows for physical redemption. Their “redemption portal” allows anyone to collect their gold bullions from their vault, or arrange to send it anywhere via insured courier. You can find a list of gold-backed cryptocurrencies here and see whether they provide redemption of the gold backing the coin/token on their website
Expenses Related with Gold-Backed Cryptocurrencies (How are these companies profitable)
AnthemGold (AGLD) provides an example of how a company tokenizing gold can structure their fees. According to the founder, Anthem Blanchard, there is a 0.40% storage cost each year. This cost is extracted from the gold holdings (the company has the same structure as the GLD ETF fee structure). In addition, there is a 3% fee for conversion to physical gold. More on this project can be found, along with an interview with the founder here.
AgAu provides another example of how a company tokenizing gold is structuring their fees. AgAu has a 0.2% per annum storage fee and charges for each transaction as well (maximum cost per transaction is 0.4%).
AurusGold (AWG) provides another example of how a company tokenizing gold can structure their fees. First, Aurus charges a transaction fee of .15% for each transaction involving the AurusGold token (excluding Ethereum related fees as AWG is an ERC20). Aurus also charges a 2% annual fee for each token in circulation. This annual fee helps pay for everything, including storage, insurance and regular auditing.
In general, companies tokenizing gold are profitable by charging storage fees, cold wallet fees, transaction fees, trading fees, fees for conversion of tokens to physical gold, and more
Traditional ETFs are out of reach of many retail investors worldwide. Gold-backed tokens, on the other hand, are easily accessible and cheaper to purchase. There is no broker needed to purchase the tokens and individuals may purchase a fraction of a token. Gold ETFs came to market in 2003 and became one of the most innovative products in the past 15 years. The launch of gold ETFs, initially, was met with a huge amount of skepticism. Most, if not all skeptics have been proven incorrect. It is evident that this new method of investing in gold will be subject to the same skepticism, but will likely prove the skeptics wrong in the near future.