(Bloomberg) –
In the 19th century California gold rush, the surest way to a fortune, according to Mark Twain, was to be in the ‘pick and shovel business.’
If 2020 has a gold fever equivalent, it is the ETF company.
Trade-backed funds backed by physical gold and silver are raising more than $ 50 billion in gold this year. ETFs now have more gold than any central bank except the Federal Reserve.
That generates windfall costs for ETFs and has been a boon for anyone involved in the business of servicing those enormous shades of shiny metal. That includes the financial companies that provide the funds to investors, through the banks and security companies responsible for storing hundreds of billions of dollars of gold and silver under the streets of London.
“These days, it’s a very good company to be in,” said George Milling-Stanley, chief gold strategist at State Street Global Advisors, the marketing agency for the largest gold ETF, SPDR Gold Shares of GLD. “There is no question in my mind that ETF demand is currently driving gold.”
ETFs typically charge fees as a percentage of the value of their assets. With investors adding to their holdings as spot gold rose this month to a record high of $ 2,075 per ounce, gains have benefited from a double impulse.
Total fees for the top 10 gold ETFs, based on current prices and holdings, are about $ 610 million a year, according to a calculation by Bloomberg News; while for the top five silver ETFs the figure is around $ 110 million. Investors bought more silver through ETFs in the first eight months of the year than was produced last year by the world’s 10 largest miners.
GLD provides approximately $ 300 million in fees per year to current holdings and prices. This is good news for State Street as well as for the World Gold Council – a group supported by mining industry that helped create the ETF – because both are taking a cut in these fees.
It also benefits the few large banks – mainly JPMorgan Chase & Co. and HSBC Holdings Plc – which hold gold and silver on behalf of the ETFs in underground bells, behind foot-tight reinforced doors. For them, it is a niche business, but as attitudes have increased in value, it has become a solid earner.
GLD’s gold is being held at HSBC’s club in London. The last time the vaulting fees were announced, in 2015 they amounted to 10 basis points, or 0.1%, per year for the first 4.5 million ounces held, followed by 6 basis points thereafter. HSBC declined to comment.
Vaulting typically earns roughly 10% of the $ 1.1 billion to $ 1.2 billion a year that banks earn from precious metals, according to Amrit Shahani, research director at Coalition Development Ltd. .
Vaulting Strains
The increase in demand has squeezed the system.
The GLD’s quarterly reports revealed that in early April it owned gold that was not kept at HSBC’s safe, but instead at the Bank of England, which only tracks the Fed in its bullion shop.
When movements of gold were slowed by social distance during the coronavirus pandemic, the BOE was unable to transport the metal fast enough to HSBC’s own club in London to meet the ETF’s demand, according to people familiar with the situation. .
The record pace of silver buying through ETFs is causing other headaches. Bulkier and less valuable than gold, it takes up large amounts of space in a club.
The supervisor of the largest silver ETF, the iShares Silver Trust or SLV, is JPMorgan. For a long time, the prospectus of the fund included a note explaining that if its holdings were larger than 500 million ounces, it would seek an additional supervisor. But in July, when SLV’s holdings sought above that level, the clause was quietly lowered.
JPMorgan has made several deals with other vault providers in London, and is now holding silver on behalf of the ETF with Malca-Amit, which has a vault near Heathrow Airport, as well as two vaults owned by Brink’s Co ., according to the ETFs’ daily bar lists.
A spokeswoman for BlackRock Inc., which owns iShares, declined to comment.
However, bankers and logistics providers say there is still club space available in London, following an expansion during the last gold bull market. That includes room in the falcon of HSBC, according to Milling-Stanley of State Street Global Advisors.
“We are a corner of HSBC’s vault with GLD,” he said, even with the growth in the gold backed ETF. “The safe is enormous, there is no question about it. We have space in that safe. ”
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