HardAssetsInvestor

Written by Paul Amery  |

October 25, 2012

England's Gold Holdings Cross The Road To ETFs

Details

Holdings of ETF Securities' gold exchange-traded products overtake those of the UK government, vaulted across the street in EC2.

[This article initially appeared on IndexUniverse.eu and is republished here with permission.]

ETF Securities’ offices at the top end of Lombard Street in the City of London overlook the Bank of England, which is just across the road, on Threadneedle Street.

The Bank’s facade is a thick, 200 year-old, windowless curtain wall, originally designed to deter rioters or even a potential invasion force from a continent dominated by Napoleon.

That image of solidity is partly responsible for helping the Bank accumulate one of the largest gold holdings in the world. In a vault somewhere underneath the fortified structure there were 161 million troy ounces of the metal (or 5015 tonnes) at the last annual accounting date, 29 February 2012, the Bank told IndexUniverse.eu. In paper currency terms, those gold bars were valued at £179 billion in February.

But only a small proportion of that gold, around 6%, now belongs to the UK government. Most of the gold held in custody at the Bank is owned by other clients, largely foreign central banks.

The UK’s share of the total dropped sharply when then-Chancellor Gordon Brown conducted a controversial bullion sale in 1999-2002. Brown sold off 60 percent of his country’s gold at around US$275 an ounce, compared with the current price of US$1712.

But while the UK taxpayer’s interest in the last decade’s gold bull market is sadly less than it might have been, the clients of the firm across the road have been busily adding to their bullion pile.

According to Nick Brooks, head of research at ETF Securities, the holdings of the gold exchange-traded products managed by his company have just overtaken those of the UK government in size: in September, ETFS’s trackers controlled over 10 million troy ounces of bullion, compared with the UK government’s 9.975 million ounces.

ETF Securities doesn’t store its clients’ gold in its office, I should hasten to add—the firm uses HSBC as its custodian, with bullion held in a vault at an undisclosed location—but even if gold ingots haven’t physically been crossing from Threadneedle Street to Lombard Street, there’s no question that the balance of ownership rights has been tilting in Lombard Street's favour.

Other European providers have been benefiting from the increasing interest in bullion trackers too. ZKB, which manages the region’s largest gold ETF, and Source have each added over €1 billion in assets to their respective exchange-traded products so far this year. These two trackers, ETF Securities’ Physical Gold ETC, Gold Bullion Securities and Julius Baer’s Gold ETF are Europe’s largest five commodity ETPs.

Given the Bank’s architectural design, the association of gold ownership with financial influence and, ultimately, political power was evidently not lost on Sir John Soane, architect and surveyor at Threadneedle Street from 1788-1833.

Two centuries later, the status of central banks looks increasingly shaky. Orthodox economic opinion in most Western countries supports a ballooning and increasingly risky experiment with fiat (unbacked) money via quantitative easing programmes, even if those conducting the experiment sound ever more uncertain about the outcome. Rightly sceptical, more and investors are deciding they’ll protect their financial health by holding gold trackers.

(I own ETF Securities' Physical Gold and Physical Silver ETCs)

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