Benzinga's Exclusive Interview With Will Rhind - ETF Securities

Q: Can you tell us a little about what you do? A: ETF Securities, born in 2005, is a company in the US focused on commodity ETFS. We’re primarily a European-based company. The founder invented the first gold ETF in 2003. That was the first time someone listed a commodity on a stock exchange. It opened up the commodity market to equity investors. ETF Securities was born shortly after, with the mandate to build an exchange-traded commodity business. It is now a business with approximately 20 million under management all over the globe. Q: ETFs are commonplace now and talked about a lot. Is that why you think you guys grew so quickly? Did you just hit the sweet spot of the market? A: Two things happened. One, the opportunity came to create the first commodity ETF. That really corresponded to a time when commodities were emerging as an asset class to investors. It was the right product and the right time for equity investors to jump into commodities and diversify their portfolios. It really changed the way that equity investors get access to the commodity markets. Before, people were faced with only a couple alternatives. They would go buy the stock of an oil company, but this was more correlated with the equity markets than commodities. People wondered why their stock was going down while the price of oil would go up. Q: Why should Benzinga listeners consider investments that give them access to Swiss-stored gold? A: That’s a good question. Here in the U.S., we have four physically-backed precious metals ETFs in platinum, palladium, silver and gold. With the gold fund particulary, when we came to the U.S., our clients asked us to build ETFs backed with gold stored in Switzerland. Before, the only ones available were in the U.S. or London. People remembered that there was a historical precedent of the U.S. seizing private gold holdings during the Great Depression, so they wanted to isolate themselves from that risk when the market turned. In Switzerland, that sort of event had never happened. That was really the reason behind it, and besides the historical precedent it gives a unique offering and provides diversification. Q: Where were people historically storing their gold? A: Before the first gold ETF, the only place people could store gold was privately. Normally that meant in your own homes, usually in coins, or in banks. What the ETF did was wholesale physical gold to investors in a way that wasn’t available before. Q: What are some of the new products you’d like to introduce in the U.S. market? A: The principal vision is to become a key player in the U.S. commodity ETF market. Right now, we populated the precious metals space through a variety of ETF offerings, and we registered for a basket, or mix, of the four metals. We want to give investors exposure to all sorts of commodities, not just precious metals. We hope for more products to be launched this year. Q:What are some of the roadblocks you have to overcome in that regard? A: Regulatory hurdles are just part of the process and that can take some time. Q: In London, ETFs offer a lot of unique commodities (hogs, cocoa, corn, etc). Could you see the company bringing products like that to the U.S. at some point? A: We want to really be known as “the commodity-ETF firm” in the U.S. To do that, we clearly have got to develop the range of products you mentioned, not just precious metals. We may not offer a complete carbon copy of what we offer in Europe, but it will certainly offer some diversified asset class exposure. Q: Can you tell our listeners about the share creation process for ETFs backed by physical holdings of gold, platinum, etc.? A: The first point I’d make is that plastic phrase that all ETFs are not created equally. There are differences between different providers and different types of assets. Let me just talk to you specifically how ETF Securities ETFs are made. Very simply, what happens when you process a creation is we have something called authorized participants. That’s just a broker-dealer that signs legal documentation with the trust or ETF that allows them to create and redeem shares on demand for customers. If customers want to create shares, the way that actually physically works is the authorized participant for the customer places that order and goes into the physical commodity market and buys the relevant amount of the commodity that corresponds to the amount of shares purchased. They deliver that metal into that ETF, or into the trust, and once the trust receives that metal, the trust issues shares that back that metal fully. Then you receive your shares just like any other trade. What you essentially receive own is a share which is backed by metal sitting in a vault. So when people talk about a shortage of gold or too many futures contracts on the COMEX or there wouldn’t be enough gold to satisfy contracts, that doesn’t apply to our ETFs, because once you’re a shareholder they’re already backed by the metal sitting in the vault. The actual supply and demand doesn’t matter as much because we have already purchased and are holding the metal. Q: Is it something they’re constantly monitoring day-by-day, trade-by-trade? A: There’s people we employ whose sole responsibility is to monitor the movement in and out of the vault so that we know we have full backing for our shares. We publish on our website a barlet that shows how many bars of each metal we are holding in our vaults for each ETF, and then we also have an independent person inspect the content of our vaults twice a year so that people can be confident that we have all the bars needed to fully back the shares we issue. Q: Do you believe that metal prices will rise? A: We don’t do specific forecasting. We do fundamental analysis and research of the metals markets, and we do believe that all the precious metals exhibit strong fundamentals. We believe that the safe haven aspect of gold and silver is driving the price of the moment. Gold and silver were more of a currency play before the European situation began to unravel. So now that sovereign risk has entered the market, investors are going to gold to protect themselves. As for platinum and palladium, that is more due to the recovery of the global auto sectors because they are used in catalytic converters. Rather than being a safe haven, that is more due to the economic recovery and macro trends.