-->By: Ken Gooding

Posted: 2004/03/28 Sun 15:58 | © Mineweb 1997-2004
LONDON (Mineweb.com) - The “new, improved” Gold Bullion Securities, the World Gold Council backed scheme that effectively allows investors to buy and sell gold on the London Stock Exchange, is to be launched on Wednesday (March 31) in an atmosphere of considerable optimism.

The GBS scheme is the most important element in the WGC’s efforts to promote more investment in the precious metal. And traders suggest that, if this re-launch of GBS is to be considered a success, the volume of gold involved, at present about 25 tonnes, needs to double over the next month or two to 50 tonnes.

The GBS scheme, which is like an exchange-traded fund (ETF), was first launched on the London Exchange in December. But, in a hugely embarrassing development for the WGC, it quickly became apparent there were problems with the legal structure and the scheme would need to be revised. A lack of clarity in the scheme prevented many fund managers from buying the securities. And it is the funds that have most of the cash and therefore carry most of the market’s financial clout.

It will now be possible for funds - many of which cannot invest directly in gold bullion - to trade GBS if they want to. For the revised GBS scheme has been approved by the Financial Services Authority (FSA), the UK’s senior financial watchdog, “as being eligible for investment by UCITS funds.” UCITS stands for the “undertaking for collective investment in transferable securities” and is a European Union directive for retail funds that invest in securities and bonds and can be marketed in EU member countries.

This means the new, improved GBS should be attractive to fund managers throughout Europe and even some in the US.

Traders say the omens are favourable for the revised GBS.

For example, more heavyweight brokers will trade the securities than before. Mineweb understands that Goldman Sachs and J P Morgan will trade the revised GBS - and it seems unlikely that they would have taken the trouble to arrange to do this unless they could see a chance to make a profit in a healthily active market.

Goldman and Morgan join the two existing market makers in GBS, the HSBC and UBS investment banks.

Simon Village, joint managing director of the GBS company, told Mineweb: “The brokers are enthusiastic about it [the new GBS]. All the major brokers are behind it now and that will open up more distribution channels.”

Village also pointed out that the revisions made to the GBS scheme “open up a whole new audience” for it.

Some traders suggest the present mood of the gold market should also see the revised GBS getting away to a strong start.

They say the recent bombings in Madrid and other bomb scares in the US and Europe have reminded people that the US war on terrorism is far from at an end. This has sent some investors scurrying to buy gold. The “flight to safety” buying could go on for some time, the traders predict.

The WGC reckons the GBS scheme makes it much easier for investors who want to buy some gold to do so. Previously these investors have been hampered by poor access to the bullion market, its high costs and cumbersome purchase processes. GBS also gives investors a way of owning physical gold without the added difficulties of storing it and paying insurance on it.

Each GBS on the London exchange represents one-tenth of an ounce of gold. The bullion backing the securities is held in vaults by HSBC, or its sub-custodians. The management fee of 0.30% a year, covering custody fees and all other incidental expenses, is factored into the listed security.

It cannot be emphasised how much the WGC - which is financed by some of the world’s gold producing groups - has riding on the GBS scheme. It is not simply that it has put more or less all its eggs in this particular basket. The WGC also owns two-thirds of the company promoting the GBS scheme. The rest is owned by a company controlled by Graham Tuckwell, the other joint managing director, and which launched the first gold bullion ETF in Australia in March last year.

As one trader explained: “Interest in gold has sparked up, so there is a reasonable market environment for the new product. There are no excuses for it not to perform well.”