Physical Gold Exchange Traded Commodities (ETCs)

By now, you will likely be aware of the range of gold, silver and platinum bullion coins and bars available from The Royal Mint. Bullion coins and bars may be seen by some as the traditional way to invest in precious metals as they form a physical, tangible asset which you can hold in your hand. You may also be aware that The Royal Mint offers a product called ‘DigiGold’, a digital gold trading service which is available to investors through our website. Although DigiGold is a digital product which is only available through the website, all purchases are actually backed by physical gold, silver and platinum bullion bars that are securely stored in our vault.

A further bullion investment product that is available from The Royal Mint, with which you may not be so familiar, is RMAU, The Royal Mint’s gold ETC. As ETCs are perhaps discussed less as an investment option, this article aims to outline what an ETC is, and what makes RMAU a unique way to invest in gold.

What is an ETC?

Broadly speaking, an ETC is an ‘exchange traded commodity’. It is a type of exchange traded product (ETP), much like an exchange traded fund (ETF) or even an exchange traded note (ETN). Although that seems like a lot of acronyms, in the simplest sense you can think of an ETC as a way of investing in a share of a commodity – much like you might invest in shares of a company. This is because, like other types of exchange traded products, as the name suggests, it is a commodity which is traded on an exchange. As it is a commodity, the price changes as it tracks the price movement of the commodity in question.

Many people choose ETCs as they provide an easy way to invest in all sorts of commodities such as precious metals, agricultural products or even gas and oil. They offer the individual investor easy access to the international markets for these products, whilst providing an opportunity to diversify your portfolio into other areas. As we have discussed in previous lessons, diversification is crucial if you would like to build a secure, well-balanced, well-managed and well-performing portfolio.

As previously suggested, an ETC works in a similar way to stocks and shares, as they are traded by an investor on an exchange. An ETC is listed on a stock exchange and traded throughout the day, just like shares.

The value of an ETC at a particular point in time is based on the performance of the commodity in question. Despite this, the majority of ETCs that are available on the market calculate their value by gaining exposure to the markets through ‘derivatives’. In the most basic sense, a derivative is a contract between two or more parties and the price is derived from fluctuations in the value of the underlying asset. However, some ETCs are backed ‘physically’ by direct investment in the commodity itself.

In terms of costs, generally an ETC will have a management charge associated as there will be organisational costs in running and administering the ETC by the provider. These management charges tend to be relatively low, especially when compared to other similar options. Although this is the case, there will usually be dealing costs on your chosen platform which are payable for each buy and sell trade that you execute. Again, this works in a similar way to share dealing.

In terms of volatility, investing in commodities can of course be volatile, due to the very nature of commodities themselves. Prices in commodities are heavily reliant on supply and demand and even factors such as weather, natural disasters, political economic instabilities and, of course, pandemics. For instance, an example of a commodity might be wheat. As you can imagine, wheat is a natural product and is reliant heavily on both weather and natural disasters. Similarly, oil is another commodity and, as less people used oil during the coronavirus pandemic, the price of oil was negatively impacted.

RMAU

This brings us on to RMAU, the ticker symbol of The Royal Mint’s first gold-backed ETC. RMAU stands for ‘Royal Mint Aurum’ - Aurum (or Au) being the chemical symbol of gold. RMAU is an ETC which is designed to offer investors an easy and effective way to access the gold market and trade in gold. The price of RMAU is directly affected by the gold price as it tracks the spot price of gold. This means it can be an easy way to add gold to your portfolio without physically purchasing coins or bars. RMAU is the first financial product to be sponsored by The Royal Mint and the first gold ETC held with a European Sovereign Mint.

Although it means that you will be able to buy gold without physically holding and storing coins or bars yourself, RMAU is actually backed by physical gold bars. This is because a series of London Bullion Market Association (LBMA) Good Delivery bars are held in The Vault ®, directly inside the home of The Royal Mint in South Wales. This is a unique feature of this gold ETC as you can rest assured that any gold held within the RMAU ETC is physically held and allocated within The Vault ®. In addition, it operates outside the London banking and clearing system, meaning there is no counterparty risk.

Lastly, although investing in RMAU offers retail and institutional investors the opportunity to own gold, without the associated costs of security and storage, if you choose to do so, RMAU investors are actually able to redeem their ETCs for physical gold bars or coins at any time. This feature is something which is unique to RMAU due to its association with The Royal Mint, the UK’s home of gold.