Allocated Gold Demand Surged in 2010

INVESTMENT in Allocated Gold – gold that is owned outright by an investor and stored in a professional bullion vault – rose strongly last year, according to an influential gold market survey released Wednesday.

Gold Survey 2011, published by GFMS, the leading precious metals consultancy, reported that inflows into Allocated Gold accounts combined with other investment in physical gold to offset a decline in trust fund Gold Exchange Traded Fund (ETF) investment. 

Gold ETFs are securities designed to track the Gold Price, and traded on a stock exchange like shares.

Overall in 2010 demand for Gold Bars grew 65.9% to 880 tonnes.

GFMS chairman Philip Klapwijk, speaking at the survey's launch, said 2010 saw a "significant trend to park gold in allocated metal accounts rather than ETFs". 

Investment in Gold  ETFs fell 45% in 2010, to around 338 tonnes. Overall identifiable investment demand grew 5.5% in 2010, to 1514 tonnes.

"Some of this apparent slack in ETFs... is believed to have been taken up by allocated gold accounts, which can incur costs of as little as 0.1% per year," the report said. "ETFs typically charge around 0.4% per year in fees for investment management, as well as charging brokerage fees for every transaction made."

Some price competition has begun to emerge among Gold ETF providers. Last July, iShares cut its fee from 0.4% per year to 0.25%.

Since then, the volume of gold that iShares holds in trust has grown by 52%, according to analysis by BullionVault.

BullionVault analysis also shows that the larger SPDR Gold Shares, which charges 0.4% per year, holds almost 8% less gold in trust than it did at the start of July 2010.

An investment of $1 million in an ETF charging 0.4% would, at a flat Gold Price, incur a fee of $4000 each year. This compares to $2500 per year were the fee charged at 0.25%.

The same $1 million invested in Allocated Gold with a provider such as BullionVault would incur a fee of 0.12% per year. At a flat Gold Price this would equate to an annual cost of $1200.

In 2009 David Einhorn, head of hedge fund Greenlight, switched his fund's position out of SPDR Gold Shares (ticker symbol GLD) and into physical gold.

"At a minimum this will provide some savings as the costs of storing gold are less than the fees on GLD," Einhorn wrote in a note to investors.