Interview with Stefan Garcia – “I’ve been speaking with a lot of our big investors and most are holding their current gold position, which they’ve been building up for the last five or six years, but in addition they might start looking for opportunities in platinum and palladium” explains Stefan Garcia (pictured), managing director at Source, a leading European ETP provider with over USD13.5 billion in total assets.
Over the last three years gold has accounted for 80 per cent of total net inflows into commodity ETPs in Europe. In 2012, precious metals accounted for USD7.8billion of those inflows, of which USD7.1billion went into gold, says Garcia.
Last year, the Source Physical Gold P-ETC became one of the world’s largest physical gold ETPs with over USD4billion in total assets. It turned over USD7.5billion, making it the second most traded ETP on the London Stock Exchange and “added over USD1.6billion in net new assets (compared to USD1.2billion in 2011). That made it the top ETP in Europe by net new assets across all asset classes,” confirms Garcia.
With EU countries still sluggish, Garcia notes that even though the prospects for US economic recovery look promising, there are still “strong strategic reasons to hold gold in your portfolio”.
“In January last year, we had outflows of USD75-100million because some of our larger investors rotated more into equities. Then things changed, because of the continuing sovereign debt crisis in Europe, and over the next six months we saw a reversal and half way through 2012 we were up USD500-600million. By the end of the year, net new inflows had reached USD1.6billion.”
“So far, in Jan 2013, we’re up USD50-60million which is modest, but everybody’s been getting excited again about equities. I think the next three months are going to dictate which way things will go this year,” says Garcia.
Source currently offers investors four physical products: gold, silver, platinum, and palladium. In many ways, the reason for the popularity of its gold ETP is that it represents an evolution of the industry. The first gold product was listed in London in 2004, offering investors an innovative new way to access the gold market. But over the years, as people have become more familiar with ETPs, they’ve focused more on performance and, crucially, cost. If they can save 10 basis points on annual fees, they’re going to switch. This cost issue has proved the primary catalyst behind growth in the Source Physical Gold P-ETC.
“We saw existing holders of competitor physical gold ETPs switching to ours because it was cheaper: 0.29 per cent annual fee. Some competitor products are still priced at 40 basis points. Once the product had reached a critical mass of USD1billion in assets investors were comfortable investing USD50-100million.
“Investors now know there are cheaper products out there that do the same thing, yet trade with tighter spreads and offer good liquidity. We’ve got multiple market makers, spreads have gone down to 4 or 5 basis points intraday whereas some of the other, smaller products are trading at 10 or 15 basis point spreads,” observes Garcia.
MJ Lytle, management committee member at Source, likens these additional factors to a snowball effect: “Tighter trading spreads, support from market makers, more Authorised Participants (APs): they all work together. We now have seven APs that can create and redeem the product and we’re in the process of adding another four.”