LONDON: In the aftermath of the global credit crunch and financial crisis, investors have been increasingly on the lookout for value-added and safe asset classes. In the emerging asset classes of exchange traded funds (ETFs) and commodities (ETCs), for instance, investors have tended to favor physically-backed precious metals especially gold, whose price has been appreciating over the last few months. Indeed, commodities in general including oil, gas, coal agricultural products and of course precious metals have been outperforming traditional asset classes such as real estate and equities.
“Precious metals,” stresses Tim Harvey, head of EMEA sales at ETF Securities Ltd., “have historically provided a safe haven, a hedge against inflation and a hedge against currency risk. They have often acted as an event hedge, outperforming during period of financial or geopolitical instability. As precious metals have tended to have a low correlation with most major asset classes they have provided unique diversification benefits that have often improved a portfolio’s risk-reward profile.”
Indeed, ETF Securities, which has pioneered exchange-traded commodities (ETCs) since 2003, last year launched “the world’s first Shariah-compliant precious metal ETC platform” based on physical platinum, palladium, silver, gold and a basket of precious metals, and which track the spot price of the underlying precious metal. According to ETF Securities, the platform was developed in response to growing demand for Shariah-compliant ETCs from investors in the GCC (Gulf Cooperation Council) countries, North Africa and Asia. The Shariah-compliant ETC market has grown to $2.6 billion in the last 14 months, and ETF Securities’ ETC is traded on five stock exchanges in Europe.
While ETFs are open-ended UCITS III funds that track the underlying equity index, ETCs are asset-backed (usually by physical bullion or commodity (futures) contracts) open-ended securities that track the underlying commodity index or commodity.
“This development,” says ETF Securities, “recognizes the rising importance of Islamic investors and their appetite for ETCs, which were designed to be simple and accessible tools for all types of investors. Shariah-compliance further extends the global reach of ETCs.”
According to Tim Harvey, ETF securities physically backed precious metal exchange traded commodities are Shariah-compliant. “HSBC Amanah’s Shariah Board issued a fatwa on Gold Bullion Securities, GBS in June 2004, and Metal Securities Ltd. (MSL) was approved by HSBC Amanah Shariah board in June 2009,” he explained.
The bars and ingots are held in trust in London by custodian HSBC Bank NA (USA), the leading custodian for ETCs in the world. The metals held with HSBC Bank conform to the rules of Good Delivery of the London Bullion Market Association (LBMA) and the London Platinum Palladium Market (LPPM). Securities are only issued once the metal is confirmed as being deposited into the company’s bullion account with the custodian.
Consistent with allocated gold, no precious metal is borrowed, loaned out and nor does it earn any income.
Shariah-compliant ETCs track the spot price of the underlying precious metal. The Shariah status of ETF Securities Shariah products has already been accepted by Shariah investment boards in Saudi Arabia, Bahrain and UAE, claims Harvey. ETF Securities physically backed products trade on the London Stock Exchange, Deutsche Boerse, NYSE- Euronext Paris/Amsterdam, Borsa Italiana and the Australian Stock Exchange, and are traded by some 20 market making firms, offering multiple points of liquidity. ETF Securities physically backed products are also at least as liquid as the relevant underlying physical precious metal market.
To ETF Securities’ Tim Harvey, “Gold remains the ultimate form of payment and therefore the ultimate safe haven. Similarly, platinum remains in supply/demand deficit. Robust autocatalyst demand growth driven by environmental legislation and rising income in emerging economies together with power and other supply issues in South Africa will likely keep the platinum market very tight for some time. Palladium is also benefiting from strong autocatalyst demand and its ability to substitute for platinum in some applications.”
The company stresses that ETCs are the most direct way for investors to invest in precious metals. They trade like stocks, are highly liquid, cheap and secure. “Precious metals — particularly gold,” added Harvey, “tend to outperform when equity markets perform poorly. Gold has had consistently high returns relative to most asset classes and is the best performer over the past ten years, with lower than average volatility.” The cumulative returns for ETFS physical gold between December 1998 to December 2008, was 202 percent compared with the 176 percent for ETFS precious metals and minus 13 percent for S&P 500 (equities).
