Setting the

Gold Standard
An investor’s guide to the
gold market and gold ETFs/ETCs
This brochure aims to provide investors with a better
understanding of the physical gold market and,
greater insight into the structure of physical gold
ETFs/ETCs. It helps investors understand key features
to choose the right gold product.

The first part of this brochure deals with the gold market including its
fundamental characteristics, mechanisms, and main institutional bodies.

The second part retraces the history of gold ETFs and ETCs which
goes together with the history and track record of ETF Securities.

The final part provides a roadmap for identifying whether a

specific gold ETF/ETC structure is ‘best of breed’.
Contents

The world gold market at a glance

02 Who holds the gold?
02 Supply and demand
03 How the over-the-counter
market works
03 The London gold market
04 Loco London and loco Zurich
04 How is the London fixing
price determined?
05 Special focus
Vaulting and gold clearing
05 Allocated vs. unallocated accounts
05 What is a London ‘Good
Delivery’ bar”?
06 The investment case for gold

Growth of gold ETFs/ETCs

10 Gold ETFs/ETCs milestones
11 About ETF Securities
12 ETF Securities’ physically-backed
gold product suite

The Gold Standard

13 Security
13 Transparency
14 Cost efficiency
14 Physical holdings quality
14 Track record
15 Due diligence checklist
16 Physical delivery example –
Gold Bullion Securities (LSE: GBS)
The world gold
Xxxxx
market at a glance

For thousands of years, gold has been Who holds the gold?
valued as a global currency, a commodity, The vast majority of the gold ever
an investment and simply an object of mined still exists and is estimated to
beauty. As financial markets developed total approximately 163,000 tonnes
rapidly during the 1980s and 1990s, gold (at end-2008). The following chart shows
receded into the background and many an estimated breakdown of those stocks.
investors lost touch with this asset of last
resort. Recent years have seen a striking Above-ground gold stocks
increase in investor interest in gold. Gold’s
extensive appeal and functionality, Jewellery 51%
including its characteristics as an Official sector 18%
investment vehicle, are underpinned Private investment 17%
by the supply and demand dynamics Other fabrication 12%
of the gold market. Unaccounted 2%
Source: GFMS
Investment demand for gold has soared (tonnes)

1200

1100

800 Supply and demand

600 The following two charts show the main
400
sources of supply and demand of gold as
at 31 December 2008:
200

0
World gold demand in 2008 (3,880 tonnes)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

ETF/ETC demand
Jewellery consumption 57%
Coins, bars and other retail demand
Indentifiable investment 31%
Industrial and dental 12%
ETF Securities believes that three factors Source: GFMS
set gold apart as an investment from
most other commodities: it is
indestructible; it is fungible; and the
inventory of above-ground stocks is
enormous, relative to the supply flow.

World gold supply in 2008 (3,880 tonnes)

Mine production 63%

Recycled gold 31%
Official sector sales 6%
Source: GFMS

02 | Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs
How the over-the-counter market works
The global trade in gold consists of over-
the-counter (OTC) transactions in spot,
forwards, options and other derivatives,
together with exchange-traded futures
and options. The OTC market trades on
a 24-hour per day continuous basis and
accounts for most global gold trading.
Market makers, as well as others in the
OTC market, trade with each other
and with their clients on a principal-
to-principal basis. All risks and issues of
credit are between the parties directly
involved in the transaction. Market makers
include the market-making members of
the London Bullion Market Association
(LBMA), the trade association that acts as
the coordinator for activities conducted
on behalf of its members, and other
participants in the London bullion market.
The five LBMA market-making members
of the gold fixing are: Barclays, Deutsche
Bank, HSBC, ScotiaMocatta, and Société
Générale. The OTC market provides a
relatively flexible market in terms of
quotes, price, size, destinations for delivery
and other factors. Bullion dealers customise
transactions to meet clients’ requirements.
The OTC market has no formal structure
and no open-outcry meeting place.
The main centres of the OTC market are
London, Zurich and New York. Mining
companies, central banks, manufacturers
of jewellery and industrial products,
together with investors and speculators,
tend to transact their business through one
of these market centres. Centres such as
Dubai and several cities in the Far East also
transact substantial OTC market business,
typically involving jewellery and small bars
(1 kilogram or less). Bullion dealers have
offices around the world and most of the
world’s major bullion dealers are either
members or associate members of the LBMA.
Of the ten market-making members of the
LBMA, six offer clearing services. There are
a further 59 full members, plus a number
of associate members around the world.
The London gold market
Thanks to London’s historical leadership
in the precious metals market and unique
positioning between U.S. and Asia as well
as its cutting edge clearing system, most
global over-the-counter gold is cleared
through the London bullion market, with
deals between parties throughout the
world cleared and settled in London.
The London Bullion
Market Association (LBMA)
www.lbma.org.uk
In addition to coordinating market
activities, the LBMA acts as the principal
point of contact between the market and
its regulators. A primary function of the
LBMA is its involvement in the promotion
of refining standards by maintenance of
the ‘London Good Delivery Lists,’ which are
the lists of LBMA-accredited smelters and
assayers of gold.
‘THE LBMA ACTS AS THE PRINCIPAL
POINT OF CONTACT BETWEEN THE
MARKET AND ITS REGULATORS’
London ‘Good Delivery’ bars meet the
specifications for weight, dimensions,
fineness (or purity), identifying marks
(including the assay stamp of an LBMA
acceptable refiner) and appearance set
forth in The Good Delivery Rules for Gold
and Silver Bars published by the LBMA.
The unit of trade in London is the fine troy
ounce, whose conversion between grams is:
1,000 grams = 32.1507465 troy ounces and
1 troy ounce = 31.1034768 grams.
Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs | 03
The London Precious Metals
Clearing Limited (LPMCL)
www.lpmcl.com
Most global over-the-counter gold trading
is cleared through the London clearing
system, managed by the LPMCL, which
operates a central electronic metal clearing
hub, with deals between parties throughout
the world cleared and settled in London.
The principal activity of the LPMCL is the
daily clearing (or settlement) of precious
metal transfer instructions, bullion
account management and the resultant
end-of-day position squaring and covering
between the six London bullion clearing
members (Barclays, Deutsche Bank, HSBC,
J.P Morgan, ScotiaMocatta and UBS).
This bullion clearing function enables
settlement of both the trades between
the London bullion clearing members
themselves (all of the London bullion
clearing members are market making
members of the LBMA, as well as for their
respective account holding clients. Each
member of LPMCL has vaulting facilities
under its control for the storage of gold
and/or silver, plus, in the case of gold
bullion, account facilities at the Bank of
England, which have contributed to the
development of bullion clearing in London.
These clearing and vaulting services
help facilitate physical precious metal
movement logistics, location swaps,
quality swaps and liquidity management.
LPMCL, working in close conjunction
with the LBMA ensures and maintains
an orderly and efficient loco London
bullion clearing service, and facilitates
the international trading on the OTC
bullion market centred in London.
Xxxxx
Loco London and loco Zurich
The terms ‘loco London’ gold and ‘loco
Zurich’ gold refer to gold physically held
in London and Zurich; this is also valid for
gold physically held in New York or Hong
Kong. It is important to note that on the
loco London market only LBMA ‘Good
Delivery’ bars are acceptable for delivery.
After London, the second principal centre
for spot or physical gold trading is Zurich,
where LBMA ‘Good Delivery’ bars and other
bars of different weight and purity are
Loco London
Trade body LBMA
Good Delivery list LBMA only
Clearing system London Bullion Clearing
(electronic)
Regulators FSA & BoE
No. of clearers 6 2
No. of vault custodians 10
How is the London fixing
price determined?
The gold market operates 24 hours a day
through trading in the Far East, Europe and
North America. Twice daily, during London
trading hours, there is a fix which provides
reference gold prices for that day’s trading.
Many long-term contracts will be priced
on the basis of either the morning (AM)
or afternoon (PM) London fix, and market
participants will usually refer to one or the
other of these prices when looking for a
basis for valuations.
The London fix is the most widely used
benchmark for daily gold prices and is
quoted by various financial information
sources. Formal participation in the London
04 | Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs
accepted. For eight hours a day, trading
occurs simultaneously in London and
Zurich – with Zurich normally opening
and closing an hour earlier than London.
The loco Zurich bullion specification is close
to the London bullion market, which allows
for LBMA ‘Good Delivery’ gold, physically
located in Zurich, to be quoted loco London
and vice versa; The size of the market or
supply restrictions may require gold to be
flown in from London to meet demand
through physical loco swaps or inventories
swap; which may result in a price premium.
Loco Zurich
No trade body
All types of bars are
accepted, including LBMA
Loco Zurich Clearing
(telephone)
Swiss National Bank
2
fix is traditionally limited to five members,
each of which is a bullion dealer and a
member of the LBMA.
The chairmanship now rotates annually
among the five member firms. The morning
session of the fix starts at 10:30 AM London
time and the afternoon session starts at
3:00 PM London time. The members of the
gold fixing are currently Barclays, Deutsche
Bank, HSBC, ScotiaMocatta and Société
Générale. Any other market participant
wishing to participate in the trading on
the fix is required to do so through one of
the five gold fixing members. The London
fix is widely viewed as a full and fair
representation of all market interest at
the time of the fix.
 Special focus What is a London ‘Good Delivery’ bar?
A London ‘Good Delivery’ bar is acceptable
Vaulting and gold clearing
for delivery in settlement of a transaction
Certain members of the LBMA offer
on the loco London OTC market. Typically
clearing services. They may use their
referred to as 400-ounce bars, a London
own vaults for storage of physical metal
‘Good Delivery’ bar must contain between
and/or have the use of storage facilities
350 and 430 fine troy ounces of gold,
under security with another company.
with a minimum fineness (or purity) of
The clearing members use a daily clearing
995 parts per 1,000 (99.5%), be of good
system whereby those members utilise the
appearance and be easy to handle and
unallocated metal they maintain between
stack. The fine gold content of a gold bar is
each other for the settlement of all
calculated by multiplying the gross weight
mutual trades and third party transfers.
of the bar (expressed in units of 0.025 fine
This system is designed to avoid the
troy ounces) by the fineness of the bar.
security risks and costs involved in the
A London ‘Good Delivery’ bar must also
physical movement of the metals.
bear the stamp of one of the smelters and
1.
assayers who are on the LBMA approved
Allocated vs. unallocated accounts
list together with a unique serial number
Allocated accounts
and year. Unless otherwise specified, the
An allocated account is an account
Gold Spot Price always refers to that of
held with a dealer in a customer’s name
a London ‘Good Delivery’ bar.
evidencing that uniquely identifiable bars
of metal have been ‘allocated’ to the
Historically, the members of the London
customer and are segregated from other
bullion market compiled lists of accredited
metal held in the vault of that dealer.
smelters and assayers whose gold and
The client has full title to this metal,
silver bars they would accept without
with the dealer holding it as custodian.
question, in settlement against transactions
conducted between each other and with
Unallocated accounts
other acceptable counterparts. Every bar
Most metal traded in the London and
that comes into clearing is controlled by a
Zurich markets is traded and settled in
clearing inspector for conformity. Such bars
unallocated form. Bullion held in this
earned the distinction of London ‘Good
form does not entitle the holder to
Delivery’ status.
specific bars of metal but gives the holder
a right to require the delivery of certain
The LBMA ‘Good Delivery’ List is now
amounts of metal. Subject to the terms of
widely recognised as representing the
a client’s account agreement, a client may
de facto standard for the quality of gold
make exchanges between allocated and
bars, thanks to the stringent criteria for
unallocated accounts (provided the
assaying standards and bar quality that
2. client has a sufficient balance).
an applicant must satisfy.

1,2. Historical London ‘Good Delivery’ bars.

The London Gold Fixings have relied

on London ‘Good Delivery’ bars for the
settlement of transactions since 1919.

Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs | 05
Xxxxx

The investment case for gold as gold historically has a low correlation
Portfolio diversification benefits with most major asset classes, providing
The inclusion of gold into a portfolio unique portfolio diversification benefits
provides useful diversification benefits for long-term balanced portfolios.

Asset class performance ranked (annualised returns)

Source: ETF Securities, Bloomberg

Year
2002 2003 2004 2005 2006 2007 2008 2009 Past 10Yrs
1 Gold Real Estate Real Estate Gold Real Estate Gold Gold U.S. Equity Gold
24.8% 28.9% 27.2% 17.9% 31.4% 31.0% 5.8% 26.5% 11.8%
Performance ranking

2 Bonds U.S. Equity U.S. Equity Real Estate Gold Bonds Cash Gold Bonds
14.0% 28.7% 10.9% 7.4% 23.2% 5.5% 1.4% 24.4% 6.2%
3 Cash Gold Bonds U.S. Equity U.S. Equity U.S. Equity Bonds Real Estate Real Estate
1.4% 19.4% 7.2% 4.9% 15.8% 5.5% 0.8% 22.1% 2.7%
4 Real Estate Bonds Gold Cash Cash Cash U.S. Equity Cash Cash
-4.3% 9.6% 5.5% 4.5% 5.4% 4.7% -37.0% 0.3% 1.2%
5 U.S. Equity Cash Cash Bonds Bonds Real Estate Real Estate Bonds U.S. Equity
-22.1% 1.2% 2.6% 1.4% 3.8% -19.6% -42.8% -1.0% -3.2%

Data
U.S. Equity – S&P 500
Bonds – Dow Jones 10Yr Corporate Bonds Index
Real Estate – FTSE EPRA/NAREIT U.S.
Gold – Gold Spot Price
Cash – U.S. LIBOR 3M

Data until 31 Dec 09; All returns are converted into USD

06 | Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs
A hedge against inflation and event risk and other risk assets during periods of
Gold has historically performed well during extreme economic and financial turbulence
periods of significant monetary easing and – helping to buffer portfolio performance
high inflation. Gold has often performed and provide a source of liquidity.
well relative to equities

Gold Spot Price vs. U.S. CPI inflation

March 1968 – August 2009, Source: Bloomberg

Annual % Annual %

200 16

14

150 12

Gold Spot Price (USD) 10

U.S. CPI inflation (RHS)
100 8

50 4

0 0

-2

-50 -4
1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Return during S&P 500 worst 20%

Monthly data, from Oct 1998 to Dec 2008, Source: Bloomberg

10%

5%

0%

-5%

-10%

-15%
Gold

Russell gold

FTSE 100

MSCI World

S&P

EuroStoxx50

Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs | 07
Xxxxx

A hedge against currency weakness limited in supply versus unlimited potential

Gold, unlike paper currency, cannot be paper money/debt issuance giving it store
devalued by a government. It is physically of value characteristics.

Gold Spot Price vs U.S. TWI

Source: Bloomberg

Annual % Annual %

200 -30

150
-20

100

-10
50

0 0

-50
10

-100

20
-150

-200 30
1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Gold Spot Price (LHS)

U.S. TWI (Federal Reserve Broad Index. Inverted Scale)

08 | Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs
Investors often question whether it is
appropriate or not to set up a currency
hedge on a gold investment. While this
decision purely depends of investors’views
with regards to currency movements going
forward, the historical chart below can
provide some elements of decision.
Comparing the gold price with the trade
weighted U.S. Dollar index over the last 10
years shows that the gain of an un-hedged
gold investment would have far exceeded
any potential loss on the U.S. Dollar itself.

Gold Spot Price vs U.S. traded-weighted index

January 1999 to September 2009, Source: Bloomberg

400

350

300

250

200

150

100

50

0
Jan 99

Jan 00

Jan 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

U.S. trade-weighted index

Gold Spot Price

Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs | 09
Growth of gold
Xxxxx
ETFs/ETCs

The first gold ETF/ETC was created in Gold ETFs/ETCs milestones

April 2003 by ETF Securities’ management April 2003 – First Gold ETF: Gold Bullion
and listed on the Australian Securities Securities (ASX: GOLD) launched in
Exchange (ASX). This was followed by a Australia by Graham Tuckwell, Chairman
similar product listed on the London Stock of Gold Bullion Ltd.
Exchange (LSE) shortly afterwards, this
time created in conjunction with the December 2003 – Gold Bullion Securities
World Gold Council. (LSE: GBS) listed on the LSE in partnership
with the World Gold Council (WGC).
Gold ETFs/ETCs have proven successful
with similar products now listed on 13 November 2004 – SPDR Gold Shares
exchanges throughout the world and listed on the NYSE in partnership with
generating average weekly volumes in the WGC.
excess of EUR600m.
April 2007 – ETF Securities lists ETFS
Physical Gold (LSE: PHAU) in London.

September 2009 – ETF Securities lists the

first gold ETF backed by physical gold held
in Switzerland on the NYSE Arca.

January 2010 – Gold ETFs are traded on

13 exchanges around the world and total
AUM reach over $50bn.

Physically-backed gold ETFs – Global AUM in US$bn

Source: World Gold Council as at August 31 2009

60

50

40

30

20

10

0
Apr – 04

Jul – 04

Oct – 04

Jan – 04

Apr – 05

Jul – 05

Oct – 05

Jan – 06

Apr – 06

Jul – 06

Oct – 06

Jan – 07

Apr – 07

Jul – 07

Oct – 07

Jan – 08

Apr – 08

Jul – 08

Oct – 08

Jan – 09

Apr – 09

Jul – 09

10 | Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs
About ETF Securities
Track record
ETF Securities is the global leader in exchange
traded commodities (ETCs), with over $17bn
invested in over 180 securities, of which $9bn
(or 8.5m oz) invested in Gold ETCs as at the
end of February 2010.
ETF Securities is the second largest
physically-backed gold ETF provider in
the world, with a proven track record in
developing physically-backed strategies
aimed at maximising investor returns and
security over the long term.
ETF Securities’ ETCs have revolutionised
the commodity investment landscape, with
the robustness of their structure, simplicity
of use and true liquidity, allowing investors
to access the diversification benefits of
commodities in a single trade.
Global Listings
North America
New York Stock Exchange
(NYSE Arca)
Client service
The rapid growth of ETF Securities is
testament to its success in servicing clients’
unique investment needs, whether in terms
of single stand-alone commodity products
or as part of a diversified portfolio strategy
spanning across multiple commodities or
equities. ETF Securities clients can count
on the largest Sales & Marketing team
dedicated to ETFs in Europe as well as
on strong in-house research capabilities.
Europe
London Stock Exchange (LSE)
NYSE – Euronext Paris/Amsterdam
Deutsche Börse
Borsa Italiana
Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs | 11
World class team
ETF Securities’ physically-backed gold
ETCs are traded on seven exchanges
globally and are supported by over 20
market makers and authorised participants.
ETF Securities works with the world class
team in the precious metals market for its
physically-backed gold ETCs. For the ETCs
sold in Europe and in Asia the custodian is
either HSBC or J.P. Morgan and the trustee
is The Law Debenture Trust Corporation.
For the U.S.-listed products we use J.P.
Morgan as the custodian for the gold
stored in Switzerland and Bank of New
York (BNY) Mellon as trustee.
Asia Pacific
Tokyo Stock Exchange (TSE)
Australian Securities Exchange (ASX)
Xxxxx

ETF Securities’ physically-backed gold product suite

Product name Issuer Custodian Vault location

Europe (LSE, NYSE Euronext, Deutsche Börse, Borsa Italiana)
Gold Bullion Securities Gold Bullion Securities Ltd. HSBC USA N.A. London, UK
ETFS Physical Gold* ETFS Metal Securities Ltd. HSBC USA N.A. London, UK
ETFS Physical Swiss Gold ETFS Metal Securities Ltd. J.P. Morgan Zurich, Switzerland

Australia (Australian Securities Exchange)

ETFS Physical Gold ETFS Metal Securities Australia Ltd. HSBC USA N.A. London, UK

U.S. (NYSE Arca)

ETFS Physical Swiss Gold Shares ETFS Gold Trust J.P. Morgan Zurich, Switzerland

Japan (Tokyo Stock Exchange)

ETFS Physical Gold* ETFS Metal Securities Ltd. HSBC USA N.A. London, UK

*Shariah compliant gold ETCs approved by Al Qalam Shariah board

12 | Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs
The Gold
Standard
This section provides existing and potential
investors with an extensive list of criteria
for benchmarking whether a specific
gold ETF/ETC structure is ‘best of breed’.
It is important that investors understand
the differences between individual gold
ETFs/ETCs to ensure the product they are
considering investing in will intrinsically
meet their investment goals. We believe
that the robustness of the structures and
processes that govern physically backed
gold ETFs/ETCs are key to selecting a
vehicle that holds physical gold.
A strict due diligence process should
encompass five key areas:
■ Security
■ Transparency
■ Cost efficiency
■ Physical holdings quality
■ Track record
Security
The ETF/ETC must be 100% backed by
physical bullion at all times
To act as secure investments, physically-
backed ETCs and ETFs need to be backed
by 100% physical LBMA ‘Good Delivery’
gold bullion held in an allocated account
owned by the issuer.
■ The account should hold physical
LBMA ‘Good Delivery’ bullion
sufficient to cover 100% of the
securities outstanding.
■ Neither cash, nor certificates representing
the right to receive bullion, should be a
substitute for physical bullion.
■ Neither the issuer, the custodian nor any
other counterparty should be lending,
leasing, trading or pledging as collateral
bullion held in the allocated account.
■ Audits and bar lists should be verifiable
against the LBMA ‘Good Delivery’ list.
■ Bullion should be kept in fortified,
high-security vaults specifically designed
for bullion storage.
Investors should not be exposed to any
credit risk towards the issuer or the
custodian or any other counterparty:
■ The issuer should be a separate,
bankruptcy-remote entity (all the
bullion should be segregated from
the issuer’s other assets and liabilities).
■ Bullion should be identified as owned
by the issuer and held in allocated
form, and, as a result, be segregated
from any other assets held by the
custodian (both physically and in
its books and records).
Transparency
Published bullion holdings and clearly
identified parties are essential
Independent counterparties
Physically-backed ETFs and ETCs should
have independent authorised participants,
market makers and custodians. Such
independence has long been a hallmark
of good corporate governance for the
fund management industry; this increases
transparency and reduces any potential
conflicts of interest.
Transparent pricing
The ratio of the security’s Net Asset Value
to the London Gold PM fix should be
stable (reflecting only the historical cost)
and easy to calculate; this allows market
makers to efficiently trade the product
and provide best prices and execution
to the market.
Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs | 13
Easily understandable fee structure
Fees should be clearly identified, broken
down and their impact on the Net Asset
Value should be easy to calculate.
Reliable audit procedures
The issuer’s allocated account should
be audited by both the custodian’s own
rigorous internal audit procedures and
by an independent LBMA-approved,
independent bullion assayer.
The Audit procedure should consist of
semi-annual audits, at least one of which
should be random and encompass both
a physical inspection of the vault and a
reconciliation of the bullion with both
the custodian’s and the issuer’s records.
Daily bar list
Both the issuer and investors should
receive updated account statements
of the bullion backing the ETFs/ETCs.
■ The custodian should provide the
issuer with a bar list, updated daily for
creations and redemptions, showing
recognisable identifiers for each bar
held. These generally comprise: brand
name, serial number, weight and assay.
These should be available to investors.
■ The procedures improve transparency
and provide that the product is 100%
backed by London ‘Good Delivery’ bars.
Xxxxx
Cost efficiency
Product structure should be as cost
efficient as possible
Multiple authorised participants (APs)
The structure should allow for multiple APs
to reduce tracking error. Products with only
one AP may trade at a premium as there
are no independent arbitrageurs ensuring
that prices remain consistent with the
underlying physical gold price.
Multiple market makers (MMs)
The structure should allow for multiple
MMs to provide liquidity, reduce spreads
and to ensure the prices are made around
NAV and not trading at a premium.
Multiple market makers and APs also
reduce operational risk in the event
any one AP or MM is no longer able to
participate in the market.
Physical delivery
For maximum security and liquidity the
physical redemption should be in the form
of London ‘Good Delivery’ bars delivered to
an allocated or unallocated LBMA account
and should be within t+3 framework.
Physical delivery should not be restricted
or limited in quantity. Investors and/or
authorised participants must be able
to redeem 100% of their physical gold
holdings in a single transaction.
Cash redemption
If allowed, this should not involve
unnecessary costs.
14 | Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs
Physical holdings quality
LBMA-approved London ‘Good Delivery’
bars are paramount
Physically-backed ETCs and ETFs should
provide access to bullion with the security,
reliability and strength of the London
wholesale OTC bullion market, therefore
the bullion should be held in the form of
London ‘Good Delivery’ bars. This is a critical
point as non LBMA ‘Good Delivery’ bars
cannot be sold in the London OTC market.
The custodian should be a member firm
of the LBMA and the LPMCL
■ Custodians that trade in these markets
have vaults that are internationally-
recognised as meeting required
standards for security and storage space.
Bullion should be LBMA Good
Delivery bars
■ These bars have a set number of ounces
and a required fineness (purity) of
99.5%. They must bear the stamp of
an LBMA-approved smelter/assayer.
■ They are the only bars permitted for
delivery in the London OTC market.
■ Bullion held loco London is the most
liquid. If held anywhere else (e.g. loco
Zurich), bullion should be held with a
custodian or sub-custodian who is an
LBMA/LPMCL member.
■ Holding gold bullion outside London may
result in metal trading at a premium or
a discount to the London fixing price.
■ Creating outside London may also
require a loco swap with London; in
the event of a shortage of metal, the
swap price could increase dramatically.
For example, loco Tokyo bullion could
trade 20bps either side of the London
price (and can spike dramatically if
demand outweighs available supply).
Track record
Physically-backed gold ETFs and ETCs are
unique in the exchange traded products
world; unlike all other financial products
they involve the management and the
custody of a physical asset: gold bullion.
It is essential that investors’ carefully
study the track record of the issuer and
assess whether it perfectly understands the
mechanics and the need for security of the
precious metals market.
Therefore it is crucial that all the
participants involved in the management
of the product, such as custodian, registrar,
and trustee, are independent from each
other and possess a proven track record
fulfilling their respective roles.
In addition, for any exchange traded
product, liquidity is paramount.
A competitive product should be
supported by a network of liquidity
providers (authorised participants and
market makers), to ensure tight bid/
offer spreads and an efficient creation/
redemption processes. This then provides
depth for the largest institutional capital
flows. Products with single or limited APs
should be avoided.
Due diligence checklist

Yes No
Security 100% backed by physical bullion held in an allocated account

No lending of, or borrowing against bullion

Bankruptcy-remote issuer with segregated assets

No credit risk to the custodian

Limited operational risk

No new ETCs/ETFs can be issued without the prior delivery of gold to the issuer’s
gold account with the custodian

Transparency All major counterparties are independent (APs, custodian, MMs, trustee, registrar,
auditors and issuer)

Transparent and simple pricing

Easily understandable fee structure

Reliable audit procedures that are published, including at least one random audit
of the custodian’s vault

Published bar lists with unique LBMA identifiers

Cost-efficiency Multiple APs to ensure arbitrage opportunities and limit tracking error

Multiple market makers to ensure maximum liquidity and reduce spreads

Tight spreads and minimal tracking error

Physical Holdings LBMA ‘Good Delivery’ bars

Quality
Held with a member firm of the LBMA and the LPMCL

Held by a Custodian who is a loco London clearer, in vaults that meet required
standards for security and size

Track record Issuer has long operating track record under different market conditions

Partners are all highly experienced in their respective fields

Fund size is sufficient and reflects wide acceptance among investors

Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs | 15
Xxxxx
Physical delivery example – Gold Bullion
Securities (LSE: GBS)
All gold ETCs/ETFs should allow 100%
redemption of gold holdings; this
guarantees that the product is fully backed
by physical gold. Redemption should be
permitted either directly or through an
authorised participant (AP).
Gold Bullion Securities investors can
submit a Redemption Form for all or part
of their GBS holding. They can choose
redemption by cash or in gold.
ETF Securities is able to process physical
redemption and, for gold, the investor must
have an unallocated bullion account with
a member of the LBMA. This is possible
because the product is truly 100% backed
by physical gold.
This process is clearly explained in the
Gold Bullion Securities prospectus
(extracts from pages 22, 32 and 33 of
the GBS prospectus, dated 15 October
2009) and summarised below:
1. The Legal holder of securities needs to
complete a Redemption Notice (detailed
information available in the prospectus)
and in particular provide the details of
the number of shares to be redeemed,
intended redemption date and details of
an unallocated bullion account number
held with an LBMA clearing member into
which gold shall be transferred.
16 | Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs
2. The Legal holder of securities must lodge
a Redemption Notice with the registrar
(in this case Computershare Jersey).
3. Computershare identifies Security
Holders’ GBS holding, undertakes the
necessary money-laundering checks
required by the Jersey regulator and
places the shares for redemption
into an escrow account. Once the
Redemption Notice is validated, and
the registrar contacts the Holder to
confirm the Notice’s acceptance and
arrange for a US$ 750 (VAT inclusive)
redemption fee to be deposited into
the GBS bank account.
4. Computershare calculates gold value at
T+3 and awaits deposit of redemption fee.
5. Gold Bullion Securities sends a request
to the independent trustee to instruct
the custodian to withdraw gold and
deliver to the holders’ nominated LBMA
unallocated bullion account.
6. The custodian receives and
executes the instructions.
It is important to note that redemptions
received by 3.00pm will usually be settled
three business days following the date
upon which a valid redemption notice
and redemption fee is lodged with
the Company.
Disclaimer
General
This brochure has been provided by
ETF Securities Marketing LLP. (ETFSM)
for access to professional investors and
no other person or entity should rely
on the information contained within
it. ETFS Metal Securities Limited (MSL)
and Gold Bullion Securities Limited each
are regulated by the Jersey Financial
Services Commission; ETFS Metal
Securities Australia Limited (MSAL) is
regulated by the Australian Securities
and Investments Commission; ETFS Gold
Trust is regulated by the United States
Securities and Exchange Commission
(each an ‘issuer’, together the ‘issuers’).
This document does not constitute an
offer or recommendation to enter
into any transaction with the issuers.
Potential investors should obtain their
own independent financial, taxation, and
legal advice before making any investment
decisions, and should fully understand
the risks associated with such investments
which are set out in the relevant entity’s
prospectus. Investments in the issuers
securities should be based solely on
the relevant prospectus of each entity,
which may be obtained at
www.etfsecurities.com
Risk factors Restricted investors
The issuer’s securities may or may not be The document is not, and under no
suitable for a particular investor. Investors circumstances is to be construed as
should carefully consider the risk factors an advertisement or any other step in
set out in the relevant prospectus. Past furtherance of a public offering of shares
performance is not an indicator of future in the United States, Canada or any other
returns, and investments in these products province or territory thereof, where the
carries with it certain risks which are set issuers are not authorised or registered for
out in the relevant issuer and Company distribution and where no prospectus for
prospectus. The value of an investment a issuer has been filed with any securities
may decrease as well as increase and commission or regulatory authority.
investors may not get back the amount This document nor any copy hereof should
invested. Products are priced in their not be taken, transmitted or distributed
base currency and can be traded in (directly or indirectly) into the United
multiple currencies therefore the value States or Canada. Securities issued by
of investments will be affected by the issuers may not be owned or acquired
exchange rate movements. with the assets of an ERISA plan (with
the exception of ETFS Gold Trust). This
This document is being provided to document is issued for the sole use of
persons who are considered professional the recipient and may not be copied,
investors (as defined in the UK Financial distributed or shown to any other person
Services and Markets Act or its equivalent with the express consent of ETFSL.
under applicable law or regulation in the
relevant jurisdiction) and have professional
experience in investing.
This document includes independent
market commentary prepared by ETFSM
based on publicly available information.
It does not constitute financial product
advice nor should be construed as an
offer for sale or utilised as the basis for
any investment decision. Although ETFSM
endeavours to ensure the accuracy of
the content in this communication,
ETFSM does not warrant or guarantee its
accuracy or correctness. Where ETFSM
has expressed its own opinions related to
product or market activity, these views
may change. The third party data providers
used to source the information in this
communication make no warranties or
representation of any kind relating to
the accuracy, completeness, or timeliness
of the data provided nor shall they have
liability for any damages or any kind
relating to such data.
Setting the Gold Standard – An investor’s guide to the gold market and gold ETFs/ETCs | 17
Contact details
For more information on ETF Securities products,
please visit the website on www.etfsecurities.com
Alternatively please contact one of the local offices.

Europe North America Asia Pacific

ETF Securities Marketing LLP. ETFS Marketing LLC. ETF Securities Ltd. Japan
6th Floor, 2 London Wall Buildings 11th Floor, 48 Wall Street Ark Mori Building 12F, 1-12-32 Akasaka
London EC2M 5UU, UK New York, NY10005, USA Minato-ku, Tokyo 107-6012, Japan
t +44 (0) 207 448 4330 t +1 212 918 4954 t +81 3 4360 9101
f +44 (0) 207 448 4336 f +1 212 918 4972 f +81 3 4360 8201
e info@etfsecurities.com e info@etfsmarketing.com e info@etfscurities.com