Sunday, 30 October 2011

Gold investors: support competitive pawnshops

Sweeping reports on the global gold market can be too slick for investors like me to get their heads around. But I want my gold exchange traded fund investment (PHAU) to have a foundation in something that I can see for myself. This might be an unrealistic aim but I'm trying.

So far...

When I checked my local gold market on the Narroway in Hackney Central the pawnbrokers offered better prices for scrap gold than the jewellers.

That was all I could squeeze out of my first aimless mission. Then a foray south into Tower Hamlets found muslim gold owners breaking their religious code to pawn their gold.

What next?
If my local gold market is dominated by pawnshops are they offering a good deal? A possible lead came from the BBC report on the gold buying season in India by Delhi reporter, Mark Dummett, for BBC Radio 4's The World Tonight.

Dummett talked about the big business of lending against gold in India and one successful example of a company that does it: Muthoot Finance.

Muthoot, which listed on the Bombay Stock Exchange in May, also opened its first store in the UK last year in the heart of London's Indian community in Southall, in west London. In the UK it charges interest rates between 5.99% per month (for loans between £20 and £199) up to 2.5% (for loans above £3000).

Taken at face value these rates look far better than the 8% per month offered by pawnshops in most other UK high streets.

That's what I was offered at a Money Shop in Bethnal Green - (I couldn't find the rate on its website) and it's the going rate at H&T, a publicly listed UK pawnbroker which explained the deal in its full year results published in March 2011.

H&T said that 95% of the collateral for its loans was gold jewellery, precious metals and/or diamonds. It said: "The pawnbroking contract is a six month credit agreement bearing a monthly average interest rate of 8%."

It also said that if a customer "does not redeem the goods by repaying the secured loan before the end of the contract" it will "dispose of the goods either through public auctions... or the Retail or Scrap activities of the Group."

Since last year there seems to have been a monumental rise in the amount of people failing to collect their items. The group reported scrap profits from "items forfeited from the Group's pledge book contributed £9.0 million (to profits) in 2010" compared to £2.1 million in 2009. However I'm not sure if those figures should be taken at face value (there was some kind of technical postscript).

This looks interesting. My guess is that most of this reclaimed gold will not be recycled as jewellery in the current climate because there are too few buyers (that's what Hackney jewellers were saying).

So what happens to this gold? Does it re-enter the financial system where investors like me buy and sell depending on the price but have no real demand or desire for the metal itself?

May be it would be better for gold investors if people who owned it kept hold of it - even if it remains in a pawnshop's safe. That's not likely to happen while loan rates remain so high. The double disadvantage for anyone pawning their jewellery is that they only get scrap value (weight) and if they want to replace it they'll have to pay the premium for craftsmanship as well as the spread on the gold price.

Before getting too excited about the Indian invasion this isn't a massively well researched piece and although I've put in some questions to the companies mentioned, none have got back to me.

Back to the slippery global picture, the current high price of gold is not expected to deter Indian retail buyers (the biggest demand for gold).

But some Indians think gold loan firms like Muthoot are selling their deals too hard and I haven't checked what the rate of 'forfeit' is for Muthoot - although a lower loan rate is likely to help.

ETF relevance?

I need to get a picture of how important the scrap market is to the global price. In its 2010 Gold Survey analysts at GFMS, a precious metals research agency, said there were three sources of supply in the global gold market.

The first was mining which accounted for 2,572 tonnes in 2009 and the second was scrap at 1,674 tonnes (39% of total supply) with central bank third and only accounting for 41 tonnes.

GFMS analysts said that the supply of scrap gold increased significantly in 2009 in North America and Europe. "Much of this growth was a result of heavy promotion by an improving network of scrap collectors, who made great use of consumer's need to sell unwanted jewellery to raise cash in a challenging economic environment." Read H&T's results to see how they cashed in on this with their "gold bars".

The question is how much of the "unwanted jewellery" was really unwanted and whether that supply would have been less if consumers were offered better deals?

Cashing in on gold loans to muslims in East London?

Jewellery shops on Whitechapel Road, Tower Hamlets, East London.

The quest to connect with my gold ETF investment led south from Hackney into Tower Hamlets. Why? Because on Wednesday I heard a report on the BBC about gold in India in which the reporter said gold was in the DNA of indians.

I noticed the journalist had also reported on people panning for gold in the sewers of Dhaka, the capital of Bangladesh.

I wondered if gold was in the DNA of Bangladeshis too and London's highest concentration of Bangladeshis is just a short cycle ride south of Hackney. May be they had a more interesting gold market there.

Inside UKAY Jewellers on Whitechapel Road I was offered £38 for my signet ring (Hackney Jewellers offered between £30 and £40 so nothing special there).

A visit to Bombay Jewellers proved fruitless as they didn't deal in anything less than 22 carat gold.

I asked both if there were any Bangladeshi pawnshops - in Hackney they tended to offer better deals. Both said no adding that Muslims don't pay interest and so they don't run pawnshops or offer loans. I'd forgotten that Muslims don't do interest! It's not halal.

But somebody in Whitechapel must be using pawnshops - a new one was being built two shops up from UKAY (It was Fish Brothers, picture below, which has a branch in Hackney.)

Had I known there was a Money Shop on Whitechapel High Street I'd have asked them. It's right opposite the East London Mosque (For the latest on East End politics you could start here: Trial by Jeory)

Instead I dropped in on the Bethnal Green Road branch where they offered me £45 for the ring (much better than the jewellers). The woman behind the counter was happy to chat and said that she had served a number of Bangladeshi women, usually pawning their wedding jewellery.

I asked if they had been able to reclaim it, she said generally yes, they had. She also said that an interest rate on a loan backed by my signet ring would have cost me just under 8% a month.

The moral of the story?

Hopefully families that are put in a position where they need to pawn jewellery aren't doubly stigmatised by Islamic law. They probably are but I don't imagine it would take much imagination to neutralise the unacceptable interest rate and may be charge a storage cost instead.

It seems that there all sorts of options allowed under islamic law that could easily be applied to pawnshops and give Muslims access without breaking their religious code.

Hopefully a loophole will be found in this lot before the financial crisis drags poorer gold owning muslims into a gold loan dilemma.

That's not to say that taking gold to a pawn shop is good idea. It's not a cheap way to borrow money and that's what I'll look at next.

Anything to do with a gold ETF?

May be not yet.

Gold ETF Investor market report: 24-28 October 2011

As most commentators have pointed out, last week's eurozone rescue package (BBC explanation) coincided with gold prices rising again. The interesting point being that gold moved in the opposite direction to shares: on Friday the FTSE 100 closed down 0.35% while ETFS Physical Gold (PHAU) gained 0.84%. (Google Chart)

The big picture reasons were discussed in a Wall Street Journal piece in which the vice president at RBC Capital Markets said the eurozone plan involved printing lots more money and so it was an "inflationary rally" (if there's more money around then prices will rise).

Similar observations were made by a contributor to Mineweb but with a different spin: "We do not think that is the reason why gold and silver are rising... We need the ship to be made seaworthy. There is no sign of the political or financial will to do that. This continuing lack of confidence and uncertainty is a far greater contributor to the rising gold price than anything else."

Monday, 24 October 2011

My local gold market: Hackney

I bought a small amount of gold a month ago and it has already lost about 10% of its value. The gold I bought wasn't the sort I could hold in my hand, it was shares in something called an exchange traded fund (ETF).

I bought the stuff because gold is meant to be a safe bet in times of financial trouble - like now - but recently it hasn't behaved as expected.

The losses add some urgency to the task of understanding my gold investment. Unfortunately the factors at play are so grand or so technical (eurozone debt crisis, Chinese growth, futures markets, currencies) that it's hard for a normal human being to get a real feeling for it.

So I turned to a gold market closer to home where I live, Hackney in East London, hoping this might help me 'connect' with my small lump of metal.

Narroway is the main street in Hackney Central, the focal point of the recent riots (video below) and it has five pawnbrokers/jewellers who buy and sell gold (one of them, Fish Brothers, was shut).

I didn't think this market would have much to do with gold ETFs so I took a gold signet ring I was given by a relative.

The first place I went to was called Cashier where staff served customers from behind perspex screens embedded in battered-looking booths. When I arrived there was one guy in shop and he was getting strict instructions not to be late with a loan payment - he had until Saturday.

When he left the woman who served him dealt with me. Yes, she said, I could get cash for the ring but only after a couple of on-the-spot tests. She said she would weigh it first, give me a rough price, and if I wanted to take it further she would do a chemical test.

I've had this ring for decade or so. It had belonged to my great uncle and while I had no real idea what it was worth I was kind of hoping for a nice surprise. My expectations were tempered a little when she pointed to the '.375' hallmark which meant the ring was 9 carat gold (not very pure). But I was still shocked when she offered me £46 - a sum which would have replaced just one of my shoes.

I started asking her questions like where her gold price came from, how often it was updated and (it seemed like a normal question at the time) whether she'd had any customers coming in with gold teeth. At this point she got a little suspicious and I decided to tell her what I was doing.

We had brief chat and, among other things, she said the store was pretty busy and that she'd had a customer in the day before selling gold teeth.

As it turned out Cashier offered me the best price out of four shops I tried. The next best came from a newly opened branch of Albermarle Bond (pictured above) where I was offered £43 for the ring. The girl behind the counter also said the store was busy but no one had been in with gold teeth.

She, and all the other gold buyers, said that most customers generally over estimated the value of their gold trinkets. I confessed that I was one of them.

In retrospect it seems likely that the two shops which offered the best prices for gold (Albermarle and Cashier) really made their money out of payday loans (according to the Wall Street Journal the only booming part of the financials sector in the US).

I suspect that people who hoped to plug a hole in their finances by selling their gold jewellery would be tempted into one of their high interest short term loans.

Hackney Discount Jewellers, which has been on Narroway for 30 years, offered me £40 for the ring. The guy running the shop had a different theory about the higher price being offered for scrap gold at Albermarle Bond and Cashier. He said it was more likely due to the other shops having retail outlets - and so having some control over how much they could make when they sold the gold again.

He said times were hard and that a handful of his customers had been selling gold teeth. He added that thieves had been targeting ostentatious gold wearers.

Next was Erbiller which felt more like a traditional highstreet jewellers - it felt more like a shop that catered for female customers and there were two women looking at rings. The young man behind the counter said that business was slow with fewer people buying jewellery. He only offered me £30 for the ring.

So, the news from the Hackney gold market is that most of the people who are active are selling their gold to make ends meet. My guess is that they are selling their gold because they have to.

Unfortunately, when they walk into a gold shop, like me they'll probably be disappointed by the amount they are offered for their gold. My guess is that this experience will make the high interest loans offered by these places look like a good idea.

But over all, the trend on the Narroway is no buyers, mainly sellers. But these shops are pawn brokers or jewellers, they don't sell the coins and small bars favoured by investors.

Investors are more likely to buy from the likes of ATS Bullion and Baird & Co for physical gold. Or, if they don't want to stash it at home, to ETF Securities or BullionVault.

Hackney has some history on this front and one high profile example was highlighted this year by one of the UK's most successful fund managers, Sebastian Lyon, who runs the £1.4 billion Trojan fund and the £370 million Personal Assets Trust.

Lyon likes gold and has about 13% of these funds' assets in gold - mostly using the same vehicle that I do: exchange traded funds.

In a report to his investors in June he said he said he wasn't worried that the gold price was in bubble: "With only 0.6% of global financial assets invested in gold compared to 3% in 1980 and with the supply of paper money increasing at an exponential rate we are way off bubble territory."

But for a human angle he turned to a recent piece of Hackney history: "Martin Sulzbacher, a German Jewish banker, who hid a hoard of gold coins in a garden in Hackney before being interned in 1940".

Sulzbacher never reclaimed the coins and they were rediscovered 70 years later and returned to his son. Over this period their value increased from $1,640 to £100,000. Lyon pointed out that "paper money would scarcely have preserved wealth at all."

It's the story of one long-dead Hackney gold investor who certainly hadn't meant to lose his gold. I can't say I identify with it, but it does highlight the liklihood that the buying and selling on Narroway doesn't represent all of Hackney's gold reserves.

Thursday, 20 October 2011

20 October 2011 gold ETF report: test of faith

Today my ETF Securities Physical Gold (PHAU) shares dropped 2.4%.

I'm not going to interpret the causes - some of them are discussed here (IB Times) and some more here (MarketWatch). The argument is that if gold isn't a fear barometer it's a useless investment for a while.

Where do I stand in this situation?

First the boring bit - deciphering what's happened to my PHAU shares. Then I'll assess whether I'm in enough pain to act and, lastly, whether I have enough knowledge to act sensibly.

When I bought the shares on 22 September I paid $172.734 per share (that's before adding the £11.95 I was charged to carry out the transaction.)

At the close of business today Hargreaves Lansdown would have paid me $158.03 for each of them. (The offer price was $158.22 per share.)

So my shares have dropped 8.5% in their dollar value - again that's before adding the cost of dealing.

Unfortunately that's the happiest spin my gold ETF story gets today.

When I bought the shares they cost £111.9787 each. There were 8 of them which adds up to £895.8296.

By the end of today - 20 October 2011 - my eight shares had a sterling value of £803.81 according to HL which used an exchange rate of $1.5728 to £1 to get this figure.

So in sterling, before dealing costs, my loss is £895.8296 - £803.81 and on that count I'm down £92 which equates to a 10.27% loss. That's a lot worse than the 8.5% dollar loss calculated above.

That appears to be because the pound has strengthened against the dollar (check this Google chart). It now costs me more to buy pounds with my gold ETF dollars than it did back on September 22.

At the end of 22 September £1 would have bought me $1.5358. Now, nearly a month later, my pound buys me $1.5728. That works out at a 2.4% increase in the purchasing power of my pound against the dollar. That has worked against me because my investment is in a dollar denominated asset.

If I wanted to sell now I'd have to include a £11.95 transaction cost which would come off what HL would pay me: so £803.81 - £11.95= £791.86.

When I first bought the shares I also paid £11.95, a total of £907.8 for my shares and so the difference between the entrance and exit price widens again. Now I would be exit with £791.86 when I spent £907.78 entering. A £115.92 loss or -12.7%.

So what do I do?

It feels like I picked a testing time to try out a 'leap-before-you-look" investment style in gold. But where does my faith lie? Should I sell and wait til things get better? Or should I hang on?

I'm a financial journalist of sorts (out of work at the moment!) and I've written about gold related investments for a while. This generally involved passing on various people's views about the price of gold and silver.

It's embarrassing but while writing about it, it didn't cross my mind to ask such a basic question as: "Where does the price of gold come from?"

But when I bought physical gold ETF shares it was an obvious hole in my knowledge because my investment tracks the "spot price" of gold.

Adrian Ash, head of research at the BullionVault helped me work towards an answer in this piece: Is the gold "spot price" real?

Then today I read some of this blog "Gold Chat" and was relieved to find out that it's quite common for people to take the construction of the gold price for granted. They don't realise that it's an issue until they buy the stuff.

Bron, who works at Perth Mint in Australia and writes Gold Chat said: "It was always amusing to me when clients would ring up to buy and we would quote a price and then, naturally, they would say “Well, where can I get what the spot price is?” so they could work out if our price was “fair”. The answer was, “It doesn’t exist.""

I expect there will be lots more surprisingly basic (or stupid) questions I need to answer before I get comfortable with the product I own, let alone the gyrations of the gold market.

On that front Bron is a reassuring read for people left confused and worried by the daily shifts in the gold price - look at the day trading section of the Investment Time Frames section. I feel like this has provided me a bit of space to work out what my motivations were for buying gold in the first place. I'll be looking at Gold Chat's investment time frames: part one and part two to start off with.

I don't know what I'm doing but, at the moment, owning gold has forced me to pay attention. I don't think I'd be interested if I wasn't invested enough for this to be a painful experience.

I'm not interested in diversifying until I have a better grasp of what I've already got - although I do own BlackRock Gold and General Fund too.

Wednesday, 19 October 2011

October 19 2011 gold ETF investor report: what's going on?

Yesterday (October 18 2011) the gold price fell and, subsequently my physical gold ETF (PHAU) shares closed down more than 2%? They've recovered a bit but what happened?

A story from Reuters said: "Gold fell for a second session on Tuesday as investors worried about slowing Chinese growth, a warning on France's credit rating and dimming prospects for a solution to the euro zone debt crisis."

To me these are all "known unknowns" - If one expert says one thing I believe it until another expert contradicts it - I have no evidence of my own.

But on Tuesday what I didn't understand was that all of these known unknowns were saying that everything looked bleak for the world economy. So why didn't gold, the investment of choice for fearful people like me, rise on this news?

Was it the same thing that happened last month when the gold price fell alongside share prices on stock exchanges around the world? That fall prompted me to buy my PHAU shares on 22 September. (Markets and gold fell further on Friday 23 September - the day I bought my units in the BlackRock Gold and General fund - and then fell a great deal more on Monday 26 September: here's a Google chart of the fall.)

What were the reasons given for the falls in September? There were some who said it was because the price of owning gold futures was raised (margins) by 21% on Wednesday 23: story in Forbes and Zerohedge. There was a different suggestion from CNN saying it was deflation fears. And then a lot of people were buying dollars (see chart below) as investors looked for a safe haven... but not gold.

I feel I need to understand why gold is moving in the same way as shares when, up until recently, it tended to move in the opposite direction. I also need to have view on whether this new relationship is likely to continue. Unfortunately I can only ask an expert and hope I get the right answer.

For now I'll go with some comments from the Reuters story which pointed to research from CitiFX (part of Citigroup) who said they expect gold to rise above $2,000 an ounce after a correction (the current falls) and eventually trade as high as $3,400.

It said "Gold has gone from being a protection against 'risk off' to a 'risk-off trade' in itself ... We still believe that this market nervousness has further to run in the coming weeks or months" (In other words people don't seem to buy gold to protect themselves anymore.)

The story also points to independent investor Dennis Gartman who plans to halve his gold positions, citing bearish technical signals and prospects of margin-call selling.

All this technical stuff... and I still can't get my head around what's supposed to happen in normal times.

When it is put up against the FTSE 100 over the last year it looks pretty clear that the physical gold ETF generally moves in the opposite direction of the stock market. When share prices rose gold fell and vice versa (click on these charts to enlarge - unless your eyes work properly)

I've included what I hope is a version of this dollar index - bascially the global value of the dollar. This is the value of the dollar against a basket of currencies - I could only find it dating back to April 2011 so that's where I've gone back to.

The relationship between PHAU and the FTSE seems to be changing. A look at their percentage changes appears to show some kind of a change - in September and October they move together more often.

But then there doesn't seem to be much of a change in the relationship between PHAU and the dollar index, other than gold getting a lot more volatile - but that's just from casting an eye over it. I'll have to do something a bit more scientific to find out for sure.

I don't think any of this is going to help me... but I've got to start somewhere.

Monday, 17 October 2011

Is the gold "spot price" real?

I don't own gold I own the 'spot price' of gold

After taking a look at the prospectus for my ETFS Physical Gold (PHAU) shares I'm fairly sure that I'm not really the owner of gold. Yes the shares are backed by real lumps of the stuff in a vault but the chances are that I’ll never get my hands on it.

In reality the gold backing my PHAU shares is more like collateral - it’s what I have a right to if all else fails. Before that happens though, the prospectus for ETFS Physical Gold says my shares are valued at something called the “spot price” of gold (ETFS said that PHAU tracks the loco London spot market).

So what is this “spot price”?

On the face of it, the construction of the gold price appears a bit random. Adrian Ash at UK online gold and silver market BullionVault told me that the price is not standardised, which means it’s not like tracking the share price of Marks and Spencers for which there is a single price quoted through the London Stock Exchange.

So, in the case of gold, the source of the price is not set in stone. Ash says that the data feed that supplies the free online "spot" chart at BullionVault, where he is the head of research, is not likely to be the same as the data feed that supplies, say, the chart at Canadian bullion dealers Kitco and the prices may be slightly different.

This is because the companies that provide the data feeds can pick and choose the sources of the data. These will be dealers who have agreed to pass on their live buying and selling prices. However Ash points out that any difference in price will be minimal because a dealer who deviates far from the global price will either have everyone knocking on their door… or no one.

In general though, the prices that make up the core of the global spot price come from the big banks listed as the “market makers” for the London bullion Market Association – centre of the world's wholesale physical trade.

These include the likes of JPMorgan, HSBC and to be an official ‘market maker’ an institution promises to offer prices at which they will buy and sell gold at all times during the hours of London trading.

But these banks are global so when trading shuts in London it shifts over to New York.

Wherever the trading is going on, the prices offered are being fed to the likes of Bloomberg and Reuters and other data providers who then compile gold “spot prices” for their clients. To do this they take the mid points between the buying and selling prices offered by each market maker and find the average.

Ash said: “So take note – any "spot" price data you see will fail to show any widening of the spread between buying and selling prices during strong volatility.” So investors should look carefully at the difference between the price they are being offered and the gold spot price.

There are further complications to the foundations of the “spot price” and the extent to which it describes the price of physical gold. To start with, the London market makers are not the only sources of data or the only influence on the gold price.

But during London trading hours they are the biggest players and the deals being done in London are for metal and are supposed to be completed within two days. But that’s not the case in other markets that influence the gold price. Ash said that when trading shifts to the USA the biggest gold market open for business becomes the New York futures market – where promises to deliver gold at a specific date are traded, but the vast bulk of contracts are in fact settled for cash, not metal.

Influences like this are somehow factored into the data feeds for “spot gold” prices supplied to traders.

In contrast to the apparently laissez faire price setting – where there can be minor discrepancies – there is no flexibility about the gold that is bought and sold in the loco London spot market.

This is entirely standardised with approved refiners, vaults and traders. If the gold is in the system it is considered good for delivery and if it leaves the system it isn’t allowed back in without severe checks.

Conclusions: Supply and demand, investor fear, interest rates and the value of the dollar are the engines that drive the gold price. But the gold price itself is the speedometer and it seems sensible to check that it's actually measuring what you want it to measure.

The fact that it doesn’t include spreads - the difference between the price at which gold is bought by market makers and the price at which they sell it – essentially means that gold is will not change hands at this price.

It may be useful to find out more about when and why spreads widen and whether the changes are large enough to let them influence an investment decision.

Also, does anyone monitor the differences between gold price data feeds, particularly in times of crisis? Are there any technical dangers in terms of the gold price?

Saturday, 15 October 2011

Gold ETF bestseller for retail investors?

The three most heavily bought shares (by value) were the same as the three most heavily sold shares by investors using Hargreaves Lansdown on Friday. These were Barclays, Lloyds and the iShares FTSE 100 exchange traded fund.

The ETFS Physical Gold ETF (PHAU) was one of the few shares on the top twenty list that didn't also make a showing on the list of shares being dumped at high speed by investors.

On Thursday Hargreaves Lansdown published an interim management statement which said that the number of clients opening accounts had increased but added that it wasn't expecting much action from them: "Whilst uncertainty remains about sovereign debt and default and a possible second recession, it is increasingly likely the retail investor will feel they need more pounds in their pocket and may continue to defer new investment decisions."

It's hard to tell if their buying and selling lists illustrate this prediction, or whether retail investors see gold as a kind of cash.

Also on Thursday the Sterling denominated PHGP was the gold ETF of choice (At close on Friday the spreads for PHGP were bid 10,382 offer 10,385 or 0.028% which were narrower than the spreads for the dollar denominated PHAG $164.09 and $162.3 or 0.12% - I was under the impression it was usually the other way around.)

Friday, 7 October 2011

Check LSE not broker for $ price of PHAU gold ETF shares

In the last post Hargreaves Lansdown (HL) told me what I'd paid in dollars for my ETF Securities Physical Gold shares (PHAU) because it wasn't on my contract note. I then asked them whether I needed to get in touch with them every time I traded to find out what I'd paid in dollars.

One of their traders emailed me saying that for now the details of how much I'd paid in dollars would not be available via my HL account but they were looking into adding them.

In the meantime I was told that I could find the particulars of my trade, priced in dollars, on the London Stock Exchange website.

So I took a look and yes, the details of all trades for one day are available for every share that is dealt on the exchange. An investor will need to be able to identify their own trade. I'm hoping I can do so just by knowing the number of shares I bought and the time I did the trade (and hope that no one else had done anything too similar recently).

How do you find these dollar prices? You can simply type PHAU into the search at the top of the LSE site and its page will come up - half way down you'll find a box showing the five most recent trades.

If you want to see all the trades for that day then adjust the controls above the displayed trades.

It should look like this:

Wednesday, 5 October 2011

What happened when I bought PHAU gold ETF?

I paid £907.78 for 8 PHAU shares (ETF Securities Physical Gold ) at 11.20am on 22 September 2011. This physical gold exchange traded fund is valued in dollars. When I bought it my pounds were converted into dollars by my broker Hargreaves Lansdown and used to pay for the shares. But the price I paid in dollars was not mentioned anywhere on the contract note from Hargreaves Lansdown and neither was the exchange rate my pounds were converted at.

This meant that I could not see how much I had actually paid for the gold and how many dollars my pounds had bought in order to make that payment.

I'm a novice as a gold ETF investor but I would have thought an investor should have this information, so I asked for it. Hargreaves Lansdown staff were helpful but, at first, weren't sure I'd be able to get an answer. However I did get a reply by email saying that all the figures had been supplied in sterling because all the trades were settled in sterling.

But Hargreaves also added that the "dollar price for your purchase of eight shares in ETFS Physical Gold (PHAU) was $172.734 per share, which converts to £111.9787."

That's an exchange rate of 172.734/111.9787 which equates to $1.54 per £1 which is pretty much what I worked out the day before yesterday.

I'm not yet sure how useful it is for me to know the dollar value of the gold or the dollar value of my pounds. But it feels like I should know this and be able to evaluate its usefulness for myself.

ETF Securities seems to agree. It doesn't say much about currency in PHAU's prospectus other than this pretty obvious point:

"Currency: Bullion prices are generally quoted in US dollars and the price of Metal Securities will be quoted on the London Stock Exchange in US dollars. To the extent that a Security Holder values Metal Securities in another currency, that value will be affected by changes in the exchange rate between the US dollar and that other currency."

The impression I got from Hargreaves Lansdown was that the conversion into pounds and dollars was automatic - I wasn't sure if ETFS was responsible but I think it is Hargreaves that does this bit

I must have got the wrong end of stick and maybe it's done by Hargreaves at the moment of buying or selling - but I don't know.

The other mystery is the spread which didn't look at when I bought the shares - there was quite a short space in which I had say accept the price I was offered and I didn't think to look. So I don't know, if I had decided to sell my PHAU shares straight away, how much would I have lost just on the difference between the price I bought at, and the price at which I could sell back to market makers.

I took a look a the PHAU page on the London Stock Exchange but this said the spread at market close on Wednesday was a massive 3.2% (a bid of $156.5 and an offer of $161.5) and I think it must have been talking about something else.

I had a look at the spread this morning at 8.28am on the Hargreaves Lansdown page for PHAU and it showed a much lower spread: the bid $161.42 and $161.66 offer on Hargreaves Lansdown's site. (Maybe the LSE figures were daily highs and lows)

Apparently the spreads for the £ pound denominated gold ETF - which goes under a PHGP ticker - are wider. I'll have a look later, but I'm not yet clear on how to make knowledge of spreads useful to me.

I'm thinking that there will be times when spreads widen and when they narrow and I want to trade when they are narrow - but I don't know if these changes are significant enough for me to bother worrying about them. And, because I didn't look when I bought the shares, I'm not sure if the bid and offer price were shown - and if that was in £ or $ - but I'll have a look.

At the moment I am still in the process of understanding what I've bought but at least it's distracting me from the near 10% loss since I bought it.

Tuesday, 4 October 2011

When big banks like gold more than silver?

(Click on the chart to enlarge, the vertical axis is percentage of gold and silver futures markets) Sad hours plugging numbers into excel that probably don't mean anything. This chart takes data from the US futures market regulator's weekly report on the positions held by the largest traders in the gold and silver futures market. (Commitment of Traders report)

In the red it's the net short postions of the 8 largest traders in the gold (dotted red line) and silver (solid red line) futures markets. This measures how much of these metals banks/commodity traders are selling. This is measured as a percentage of the market (CFTC explanation) from the part of the report that measures trader concentration. Both the dotted lines represent gold, both the solid lines represent silver.

When the solid lines are above the dotted lines the banks are selling larger portions of the gold market than the silver market. The latest data shows that the biggest traders/banks on the markets have dropped their gold shorts and built up their silver shorts to such an extent that the relative market shares in the silver and gold futures markets have changed. This probably means nothing as the two markets are separate. If it does mean something I don't know what it is.

The big black arrow points to July 2009. That was the last time that the biggest 8 traders swapped their relative market shares in gold and silver. So, in July 2009 the eight biggest banks/traders were selling about 55% of futures contracts in the gold and silver markets but with the gold short positions falling and the silver shorts rising.

Monday, 3 October 2011

The start: PHAU

This is a very dull attempt to work out what I've gone and done. I bought 8 shares of ETF Securities' physical gold exchange traded fund (PHAU) for £895.8296 at 11.20am on 22 September 2011. The cost of the transaction was £11.95 and I did it through Hargreaves Lansdown.

According to Google Finance, at 11.20am on 22 September, PHAU shares were trading at about $172.7 each. From my HL receipt I don't know what I actually paid in terms of dollars, only in pounds and that was £111.9787 for each share. Assuming what I paid was somewhere near the $172.7 per share I think I got an exchange rate at about $1.54 to £1.

According to Google Finance, the pound ended the 22 Sept trading at around $1.535 so this looks about right (Basically I bought on a day when the pound was particularly weak against the dollar so my pounds didn't buy so much. But then the strong dollar was the reason that the gold price fell... I'm hoping the fact that the price of gold fell further than the value of the pound made it vaguely worthwhile buying point. But these are all concepts I still have to get my head around).

This evening (a balmy but apocalyptic feeling October 3) my HL account said that my PHAU investment was down 7.61% and valued the 8 shares at £838.71. Considering the buying price had been £895.8296, the fall works out at around 6.3%. The other 1.3% is the £11.95 fee.

If I wanted to sell now, it would cost me another £11.95 in fees so, in effect, I am really down 8.91% on my original investment. I do not have to take the conversion fee from pounds into dollars into account as that, I hope, can only be what the £838.71 figure is based on - the value of my dollar investment in pounds.

Although I own a dollar denominated ETF I cannot keep dollars in my pound denominated Hargreaves Lansdown account so, as far as I can tell, I have no choice in the timing of the conversion from dollar into pounds.

So my PHAU shares - denominated in dollars but valued in pounds - have fallen by 6.3% (from £895.8296 to £838.71). Over the same period the dollar denominated ETF shares has fallen from $172.7 to $162.07 - a fall of 6.15%.

The difference between the fall of 6.3% in pounds and the 6.15% in dollars should be accountable somewhere. I'd imagine it would be a combination of the exchange rate and the spread between the price I bought at (bid) and price I could sell at (offer).

If the discrepancy is due to the value of the dollar I would expect the value of the dollar to have fallen by 0.15% against the pound over this period. On 22 September I was given an exchange rate of $1.54 to £1.

According to HL the exchange rate on my ETF is $1.5459 but Google Finance has the current rate around $1.5575. Even if the later rate is the one being used to calculate the value of my PHAU shares, it does not account for the 1.15% discrepancy over the last 7 trading days.

So the difference will also have something to do with the spread between the buying and selling price of the shares. At close today, according to the London Stock Exchange, the bid price was $161 while the offer price was $164.15 - that's a 1.95% spread, more than I was expecting. (It turns out that the LSE's spread data is talking about something else - Hargreaves has more realistic looking spreads on its factsheet for PHAU) It may not have been that wide when I bought my shares, and I don't know what price I paid for my ETF shares in dollars when I originally bought them.

The fact that the price at the time on the exchange gave a mid price of $172.7 doesn't tell me what I paid for it and unfortunately this price doesn't seem to be shown on my receipt.

Another point of possible interest is that my deal was done on Plus Markets, not the LSE. I don't know if that's significant. On 23 September I bought £1000 of the BlackRock Gold and General fund too. I am still working on my investment strategy - basically I'm blowing in the wind pretty much at the moment.