Australian ETF targets hunger for currency-hedged gold

With the launch of Australia's first currency-hedged gold exchange traded fund (ETF), former Merrill Lynch ETF manager Drew Corbett is hoping to give Australians another reason to buy gold.
Bullion's rocket-like ascent has been well broadcast, vindicating long-term gold bugs and assembling legions of new believers in the yellow metal's capacity to counter everything from US inflation to Mideast turmoil to stock market routs.
But the market is not without naysayers: Billionaire financier George Soros, who called gold "the ultimate bubble," dumped almost his entire $800 million stake in bullion in the first quarter.
Famed gold bull John Paulson held his ground, but Soros was joined in the retreat by several other big names, including Eric Mindich and Paul Touradji.
The problem for investors in Australia, the world's second-largest gold-producing nation - is that as gold goes up, so does the Australian dollar against the greenback, diluting the value of the investment along the way, Corbett said in an interview.
For example, typically if gold goes up 2 percent and the Australian dollar rises 1.5 percent the return on gold is knocked back to only a half-percent. "We found that people were very frustrated by the currency erosion on the gold investment," said Corbett, whose BetaShares gold ETF was launched on the Australian Stock Exchange this month.
"Those who were investing in gold were frustrated that they had the additional exposure to the currency and those that weren't investing were being held back by the currency factor," said Corbett, head of investment strategy at BetaShares Capital.
While gold is up 6 percent on the early January price, it has only managed to eke out a paltry gain of 0.35 percent against the Australian dollar. This is due to gains made by the Australian dollar against the greenback.
ETFs were created in the early 1990s, initially as a plain-vanilla equity product to provide investors with the flexibility and cost-efficiency of exchange-traded products, together with the diversification benefits of mutual funds. But last month, the Financial Stability Board warned that the rapid growth in the ETF market had led to "a number of disquieting developments in some market segments".
This includes ETF products tracking markets with low liquidity, "synthetic" ETFs that employ derivatives and increased reliance on securities lending by ETF providers, according to the boardThese instruments do not apply to BetaShares gold ETF, according to Corbett.
"Our's is a conventional structure that is backed by gold bullion held in the vaults of J.P. Morgan Chase in London," Corbett said. "The hedges are done through simple forward foreign exchange contracts."
Corbett said his company goes as far as to publish the serial number of each gold bar it holds in order to provide transparency. The risk, Corbett notes, is when the US dollar starts to appreciate, unhedged gold will rise in value for those who bought in Australian dollars.
The fund holds about A$1 million in gold, Corbett said. It's early days," he said. "We expect it to grow substantially." Eric Mindich, who runs Eton Park Capital Management, nearly halved his stake in the SPDR gold trust to $326 million for the first quarter.