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As the demand for precious metals increases, so do the fees associated with gold and silver ETFs. In addition to fund managers, banks that store assets can also benefit.
• Highest demand since the highest gold price of all time
• Benefit of banks and custodians
• Well vaults with Gold and silver filled with ETFs
ETFs contain huge amounts of gold
During the 19th century gold rush in California, the United States, a pick and shovel were the safest tools for obtaining gold. Nearly 170 years later, the exchange-traded fund business is the tool of choice, Bloomberg reports. Gold and silver ETFs have already accumulated commodities worth more than US $ 50 billion this year. With the exception of the US Fed, ETFs now hold more gold than any central bank. This sharp increase in demand generated unexpectedly high fees for ETFs, which benefited market participants offering services related to these huge amounts of precious metals. In addition to financial companies that make funds available to investors, this also includes banks and security companies that store and make money worth billions of dollars of gold and silver.
George Milling-Stanley, chief gold strategist at the wealth manager State Street Global Advisors, which also manages the world’s largest gold ETF with SPDR Gold Shares, believes the precious metals business is currently very lucrative. “I have no doubt that ETF demand is driving gold right now,” he is quoted by Bloomberg.
Rates as a source of income
High profits are possible for the service providers involved because ETFs usually charge a certain percentage of the fees, which are calculated based on the value of the asset. Rates have already increased due to the record gold price of US $ 2,075 per troy ounce in August. The rise in share prices also meant that investors increased their portfolios. This resulted in more transactions at higher purchase prices, allowing ETF earnings to benefit from a double boost. According to a Bloomberg News calculation, the total fees for the top ten gold ETFs, based on current prices and stocks, are about $ 610 million a year. Meanwhile, the fees for the top five silver ETFs amount to $ 110 million. Additionally, investors are said to have bought more silver through ETFs in the first eight months of the year than the combined output of the world’s ten largest mining companies in the past year. State Streets Gold ETF alone makes about $ 300 million in fees a year. Additionally, the World Gold Council, which is supported by the gold mining industry, can also benefit from many fee payments. The group supported the asset manager in the creation of the ETF and also received part of the fees. But some big banks like JPMorgan and HSBC can also take advantage of the demand for gold and silver ETFs. Credit institutions hold reserves of precious metals purchased through ETFs in well-protected underground vaults. Although this branch of the industry is only a niche business for large banks, it is now very profitable, considering the success of gold. According to Amrit Shahani, research director at analyst Coalition Development, warehousing fees typically represent about 10 percent of the $ 1.1 billion to $ 1.2 billion that banks earn in precious metals annually. However, it assumes that the proportion will double this year.
Storage capacities under pressure
State Street generally stores its ETF’s gold reserves with Bank HSBC in London, but the fund’s quarterly reports indicate that some of the gold has been stored in the Bank of England since April. Obviously, due to contact restrictions to contain the coronavirus, the gold reserves could not be transported to HSBC’s vaults in time to meet the needs of the ETF. Another problem for warehouse managers is the rapid increase in silver purchases by ETFs. Compared to gold, the precious metal is more voluminous, but at the same time less valuable than its older brother. It takes up a lot of space in safes, but at the same time generates less profit for those responsible for storage rooms.
The custodian of the largest silver ETF, the iShares Silver Trust, is the main bank JPMorgan. It has long been said that the fund manager would seek an additional custodian if his holdings exceeded 500 million ounces. Stocks exceeded this level in July, but the clause was tacitly withdrawn. Instead, JPMorgan has made multiple deals with other custodians in London and is now moving its ETF’s silver holdings to three more vaults. However, Milling-Stanley believes that the capacity of the vaults is still far from exhausted despite the increase in capital assets. The share of raw materials that come from the State Street ETF makes up only a small proportion of HSBC’s storage space.
Editors of Finanzen.ch
