New Gold Fund

New gold fund pounded in rumour mill

By: Tim Wood

NEW YORK -- Speculation about the World Gold Council’s proposed globally tradable gold security, Equity Gold, is increasing proportionate to the time it is taking to clear regulatory hurdles.
WGC officials cannot comment because the fund remains under starter’s orders from the US Securities & Exchange Commission. The proposed fund’s registration statement was filed in mid May this year and has been under intensive development for the better part of a year.
Apparently the intellectual property dispute with JP Morgan over an earlier iteration of the fund remains unresolved, but that is a relatively minor hitch against market talk that insufficient custodial guarantees may be the only nail needed to seal Equity Gold’s coffin.
At the same time the Australian product that mimics the idea and got a healthy head start, Gold Bullion, has applied to list its product in London, achieving an early objective of globalising the product. A key gold market player believes Gold Bullion is also seeking an American listing where it will compete head on with the yet to launch WGC fund.
The developing contest is complicated by the fact that Gold Bullion is putatively a WGC product. At the same time, Equity Gold has been shown up by Canada's Central Gold Trust which closed regulatory approval in two months and has got off to a strong start.
Nik Bienkowski, Head of Institutional Investment for Gold Bullion Limited, is coy on his company’s plans which have so far been advertised to include, after the London launch, a debut in Europe on Euronext and the Johannesburg Securities Exchange.
As you know, the World Gold Council helped us bring the Australian product to market and we will work to help them similarly if required,” Bienkowski said, adding this ambiguous statement: “However, due to SEC regulations we are not able to comment on any activities.”
That would imply that Gold Bullion is indeed active in the United States as speculation reaching Mineweb now suggests.
Gold Bullion represents just over 123,000 ounces of gold worth $44 million, of which three quarters is owned by North Americans according to the company. By comparison, the Central Fund of Canada [CEF] has nearly 300,000 ounces of gold on its books, Central Gold Trust has 87,000 ounces, whilst the WGC fund has a targeted size of 1 million ounces at a gold price $350 per ounce.
A source close to the WGC product says the delay is a problem of perfection – regulators expect it. At the same time, it is a new product with global ambitions which is complicating matters. The source says America’s high summer season has also slowed the approval process, but he scoffed at suggestions that Equity Gold won’t get off the ground.
Competitors are focusing their attention on the fact that Equity Gold cannot offer absolute guarantees to cover insurance, purity, creditor and custodianship issues. Default is improbable, but fund managers never allow the slightest doubt to cloud ownership. Hence, rivals are pitching custodianship as Equity Gold’s pitfall.
It is also possible that Equity Gold and Gold Bullion could be merged, but only if the required premium to the Australians can be offset against operational and marketing cost savings. Synergies; if you must.
Not helping Equity Gold is a critical review of the exchange traded fund by Morningstar which functions as a consumer bellwether for mutual funds in the United States.
A recent Morningstar Advisor bulletin advises clients to approach Equity Gold “with trepidation” citing gold price volatility, the fact that the fund will sell its assets to cover expenses and an onerous tax burden. “According to current tax legislation, gains accumulated from the sale of collectibles, including gold bullion, held for more than one year are taxed at a maximum rate of 28%, instead of the 15% rate the new tax law assesses on longterm capital gains related to the sale of other assets, such as stocks and bonds.
” The fund may be a convenient tool for those determined to trade gold, but we think there's not much need for it in most portfolios,” wrote Marketa Larsenova, a Morningstar analyst.
Whatever the outcome, we should have clarity on Equity Gold’s future before the end of Fall. Perhaps the most reliable interim indicator is that Stuart Thomas, headhunted at a not insignficant cost to run Equity Gold, remains in place.