Saturday, December 4, 2010

Could Gold ETF Providers Offer Bullion-Backed Currency?

By Paul Amery
Tuesday, November 9, 2010

Could gold ETF providers develop their product to offer bullion-backed currency?

Gold ETFs and ETCs have been perhaps the biggest success story in the exchange-traded products market’s near 20-year history.

These bullion trackers have greatly democratised access to precious metals. They’ve offered investors exposure to gold and silver more efficiently and at a much lower cost than the traditional route of buying coins or bars. Price competition amongst issuers continues to push costs down, dealing spreads are tiny, and competing products like Bullionvault are also there to keep ETP providers on their toes.

In fact, exchange-traded precious metals have offered one of the few means for the average investor to defend his or her hard-earned savings from the currency depredations wrought by Greenspan, Bernanke, King and their fellow central bankers over the last decade. I’m one who’s been able to make use of them for this purpose – I hold both gold and silver ETCs in my personal pension plan.

But while gold and silver have performed two of the three commonly held functions of money very well – by acting as a store of value and a unit of account (try looking at the performance of equity indices in gold terms and you might reconsider your view of the strength of the share markets) – they are still hardly used, in “developed” markets at least, in their third, and historically their primary function: as a medium of exchange.

In other words, you can easily buy gold and silver in ETC/ETF format to hold in your brokerage account or savings plan, but you can’t (yet) easily do your weekly shopping in gold or receive your salary in ounces of silver.

Several variants of bullion-backed electronic currency have been launched over the last decade in an attempt to fulfil this role, as a means of everyday payment, and thereby to compete with national currencies. None has yet grown to significant size, while some have been plagued by allegations of fraud. In one well-publicised case, a digital gold currency (eGold) attracted a lawsuit from the US Department of Justice that is still being contested by the currency’s operators.

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