Higher gold vault fees a rich man’s problem

London’s famous vaults are crammed with gold and banks are raising storage fees on their customers, but the hikes won’t affect small investors who favor gold-backed exchange-traded funds.

Investment demand for gold has soared over the past decade and has accounted for more than 44% of gold demand in the third quarter of 2011, according to the World Gold Council, an industry group.

Storing this metal is largely done in London, the heart of the global gold bullion market and home to some of the oldest vaults in the world. Most storage relationships aren’t standard and favor larger clients over smaller ones or individual parties. Some vaults charge flat fees negotiated for set time periods, while others base costs on a portion of the average value of the gold.

“It’s not just the [shrinking] real estate in the vault. Since [gold] prices have gone up, insurance costs” are also higher for vaults, so they are raising storage costs on their clients, said Divnain Singh Malik, vice president at Gold Bullion International, a New York-based precious-metals trading and storage provider.

The largest clients are ETFs, which are, ironically, made up of small investors. Ten years ago, ownership of a bar of gold was restricted to the purview of wealthy individuals; today anyone with a spare $20 can own a gold ETF share, giving them rights to a portion of physical gold.

These gold owners won’t see higher storage costs because the precious-metals ETFs are some of the vaults’ biggest clients and can arrange lower vault rents.

“We use our scale to keep costs lower across the board and our ability to negotiate on behalf of all the investors means that as an individual, you’re getting the benefit of all the other investors in the product,” said Kevin Feldman, managing director at BlackRock iShares, which manages the iShares Gold Trust  .

BlackRock also owns the world’s largest physical silver ETF, iShares Silver Trust , with about 9,700 metric tons of silver held in J.P. Morgan Chase & Co.’s (JPM) vaults, primarily in London.

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Posted by admin on Dec 23 2011. Filed under Gold ETFs. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry