A handful of new products, mostly exchange-traded funds that invest in gold and even uranium, have been launched in North America in the past year. The products let investors participate in the bull run in metals without some of the risks of buying equities or the cost of owning commodities outright.
In Canada, the new products include iShares Comex Gold Trust, an ETF offered by San Francisco-based Barclays Global Investors that cross-listed on the Toronto Stock Exchange in December. There is also Uranium Participation Corp. , a TSX-listed, Toronto-based company created to invest in U308 uranium oxide; and Toronto-based One Financial Corp. ’s Gold Price Class Guaranteed Lock-In Notes, gold-linked notes that provide 100% principal protection.
The new generation of metals-backed products is targeted at institutional or individual investors who are bullish on a particular metal or, in the case of gold, want to diversify their portfolios by holding an investment that has an inverse correlation to most asset classes or introduces a hedge against inflation.
“We’d been hearing from advisors that investors were looking for exposure to bullion,” says Geri James, head of ETF products and administration at Toronto-based Barclays Global Investors Canada Ltd. The firm responded by getting a Toronto listing for the iShares, which were already trading on the American Stock Exchange.
Some advantages such alternative products have over equities is they avoid the management, exploration and operating risks associated with owning a mining company, and they often have lower management fees than a sector mutual fund. Barclays’ ETF, for example, has an MER of 0.4%, compared with an average of 2.6% for Canadian equity funds. The products also free investors who might otherwise buy commodities from the costs for storage, handling and insurance incurred in holding bars or coins.
The corresponding risks are price volatility and lack of diversification within the product itself, which is why clients are often advised to devote only a small percentage of their portfolios to these investments.
Perhaps the most unique new product is UPC, whose sole purpose is to participate in any further run-up in uranium prices. Managed by Denison Mines Inc., one of two Canadian uranium producers, UPC holds 3.95 million pounds of U3O8. About two-thirds was purchased at US$28.78 a pound in the spring of 2005, and the rest more recently at US$34.26. Uranium currently trades at about US$36.50.
Denison set up UPC to allow the public to invest directly in uranium, an opportunity usually restricted to companies that have a licence to hold uranium under the Canadian Nuclear Safety Act, says Peter Farmer, president of UPC and president and CEO of Toronto-based Denison.
“Eric Sprott [CEO of Toronto-based Sprott Asset Management Inc. ] came to us and said, ‘I’d like to own some uranium. How do I do that?’” Farmer says.
A plan to establish a trust to sell the metal was quashed because in order to get access to millions of pounds of uranium from the utilities, UPC had to adhere to a “buy and hold” strategy. So, the managers decided on a corporate structure.
UPC closed its first IPO of 18 million shares at $5 a share in May 2005, for proceeds of $90 million. A second offering, 10.75 million shares at $6 each, in December raised another $64.5 million. Both offerings were oversubscribed.
At the beginning of 2006, UPC’s net asset value per share was $5.56. The shares now trade at more than $7, a significant premium to NAV.
“Uranium is the best commodity to be in because supply and demand is out of whack, and we need it to produce nuclear power for electricity,” says Farmer, adding the metal could reach US$40 to US$45 a pound, with significant price spikes along the way.
His view is conservative compared with that of Sprott Asset Management analyst Kevin Bambrough, who calls for US$50 a pound in the near future and as much as US$500 a pound by 2015, when China, India and the U.S. start competing for fuel.
Slightly more than half of the 180 million pounds of uranium used every year by existing reactors comes from mines. The rest comes from declining secondary sources, including decommissioned nuclear missiles in Russia. Sprott Asset Management estimates mine production will need to grow significantly to meet demand for nuclear fuel from plants that are still in the planning stages. But there is a dearth of deposits in the pipeline because uranium exploration has been dormant for years.
@page_break@The other recently introduced metal-tracking products all hold gold exclusively, although Barclays is attempting to launch an ETF backed by silver in the U.S. The product is under review by the Securities and Exchange Commission.
Investors’ sudden attraction to gold reflects bullion’s recent price appreciation. Last year, gold surged 25% to hit US$540.90 an ounce, its highest level in almost 25 years. The average gold price in 2005 was US$444.75, vs US$409.70 in 2004.
Most analysts say gold has longer to run, including John Ing of Maison Placements Canada Inc. in Toronto, who called the gold bull market when bullion was trading around US$250 three years ago. He says gold has just completed the first of three legs of advancement and he expects the second to take gold above $US700 an ounce.
To tap into the market, Barclays launched its gold iShares on AMEX in January 2005, after the successful launch on the New York Stock Exchange of StreetTracks Gold Trust, one of the fastest-growing ETFs in history. Both are designed to provide a simple, low-cost way of investing in gold and expect to reflect the price of gold, less expenses and liabilities. Each share represents one-tenth of an ounce of bullion.
Since its début, StreetTracks’ NAV has grown about 28% to US$4.9 billion. Individual shares have jumped to US$55 from US$44 to reflect the rise in the gold price to US$550 from US$440 in the period. The gold iShares, with a later start, have a more modest US$200 million in assets. Management expenses for both funds are 0.4%, vs 1.67% for the typical precious metals fund in the U.S.
Other bullion funds available in Canada include Central Fund of Canada, Central Gold Trust and Millennium Bullion Fund. Central Gold Trust offers a pure gold play, while the other two funds have different degrees of precious metal diversity.
One Financial’s gold-linked notes are another way to play the gold market. For a minimum $2,000 investment, investors can buy notes linked to gold bullion. The initial investment is protected if the fund is held at least five years, but investors can cash out at market price any time for a deferred sales charge starting at 6.5% in the first year, or switch to another note in the One Financial family without charge. IE
New products make investing in gold and uranium easier
Exchange-traded funds and a new uranium company allow clients to avoid some of the pitfalls of regular metals stocks
- By: Virginia Heffernan
- February 3, 2006 October 31, 2019
- 10:54