In the 19th century California gold rush, the surest way to a fortune, according to Mark Twain, was to be in the “pick and shovel business.”
If 2020 gold fever has an equivalent, it’s the ETF business.
Exchange-traded funds backed by physical gold and silver accumulated more than $50 billion of bullion this year. ETFs now hold more gold than every central bank with the exception of the Federal Reserve.
That’s generated windfall fees for ETFs and has been a boon for everyone involved in the business of servicing those enormous hordes of shiny metal. That includes the financial firms that provide the funds to investors, through to the banks and security firms responsible for storing hundreds of billions of dollars worth of gold and silver beneath the streets of London.
“At these times, it’s a very good business to be in,” said George Milling-Stanley, chief gold strategist at State Street Global Advisors, the marketing agent for the largest gold ETF, SPDR Gold Shares or GLD. “There’s no question in my mind that ETF demand is driving gold right now.”
ETFs typically charge fees as a percentage of the value of their assets. With investors adding to their holdings as spot gold soared to a record above $2,075 an ounce this month, earnings have benefited from a double boost.
Total fees for the top 10 gold ETFs, based on current prices and holdings, are about $610 million a year, according to a Bloomberg News calculation; while for the top five silver ETFs the figure is around $110 million. Investors have bought more silver through ETFs in the first eight months of the year than was produced by the world’s 10 largest miners combined last year.
GLD is delivering some $300 million of fees a year at current holdings and prices. That’s good news for State Street and also for the World Gold Council – a mining industry-backed group that helped create the ETF – as both take a cut of those fees.
It’s also benefited the few big banks – principally JPMorgan Chase & Co. and HSBC Holdings Plc – that hold gold and silver on behalf of the ETFs in underground vaults, behind foot-thick reinforced doors. For them it’s a niche business, but as holdings have surged in value, it has become a solid earner.
GLD’s gold is held in HSBC’s vault in London. The last time the vaulting fees were disclosed, in 2015, they amounted to 10 basis points, or 0.1 percent, per year for the first 4.5 million ounces held, followed by 6 basis points thereafter. HSBC declined to comment.
Vaulting typically accounts for roughly 10 percent of the $1.1 billion to $1.2 billion a year that banks earn from precious metals, according to Amrit Shahani, research director at Coalition Development Ltd. But, he said that figure “will be pretty much double” this year.
Vault space running out
The surge in demand has strained the system.
GLD’s quarterly reports reveal that beginning in April, it owned some gold that was not held at HSBC’s vault, but instead at the Bank of England, which trails only the Fed in its store of bullion.
As movements of gold were slowed down by social distancing during the coronavirus pandemic, the BOE couldn’t transport the metal quickly enough to HSBC’s own London vault to meet the ETF’s demand, according to people familiar with the situation.
The record pace of silver buying by ETFs is causing other headaches. Bulkier and less valuable than gold, it takes up large amounts of space in a vault.
The custodian for the largest silver ETF, the iShares Silver Trust or SLV, is JPMorgan. For a long time, the fund’s prospectus included a note explaining that if its holdings increased above 500 million ounces, it would seek an additional custodian. But in July, as SLV’s holdings soared above that level, the clause was quietly dropped.
JPMorgan has done several deals with other vault providers in London, and is now storing silver on behalf of the ETF with Malca-Amit, which has a vault close to Heathrow Airport, as well as two vaults owned by Brink’s Co., according to the ETF’s daily bar lists.
A spokeswoman for BlackRock Inc., which owns iShares, declined to comment.
Still, bankers and logistics providers say there’s still vault space available in London, following an expansion during the last gold bull market. That includes room in HSBC’s vault, according to Milling-Stanley of State Street Global Advisors.
“We’re a corner of HSBC’s vault with GLD,” he said, even with the growth surge in the gold-backed ETF. “The vault is enormous, no question about that. We have space in that vault.”