The Hidden Risks of Gold Trading the Barclays NewGold Instrument, The Only Listed ETF on the Nairobi Stock Exchange (NSE)

As the world economy continues on the downturn, new investment opportunities are increasingly being pushed by banks and fund managers across the African continent with precious metals, especially gold, being key.

However, few of these banks and institutions want to admit the risks inherent in gold trading.

SEE ALSOHow the World’s Major Currencies have Depreciated Over Time vs Bitcoin’s Value in 10 Years – A Historical Calculation

The Barclays NewGoldETF, the only listed ETF at the Nairobi Securities Exchange (NSE) is a classic example of how these investment assets are offered without highlighting their inherent risks to the public.

A Gold ETF is an instrument that either tracks the price of Gold or invests in conglomerate of gold mining companies.

The Barclays NewGold ETF is an instrument that tracks the price of gold in line with the international markets. It is listed on the Nairobi Securities Exchange and trades under the symbol GLD. Any local investor can purchase it through placing an order through their stockbroker.

If an investor buys the security/share of the NewGold ETF he is effectively buying approximately 1/100th of an ounce of Gold which is held in a secure depository on behalf of investors and is backed by physical gold.

In this post, we highlight these risks and how they compare with crypto investments.

  • Custody

Did you know that gold is help in vaults far away from you. In the case of the NSE, NewGold custodian is ICBC Standard Bank which holds the gold in its vaults in London, England, the center of the gold market.

The risks of such custody are obvious. Custodian banks are not entirely trustworthy. The gold bullion could be lost, stolen, or damaged. In that event, NewGold cannot request for the sale or delivery of the gold on behalf of tis debenture holder.

Also, remember that ICBC as the custodian is allowed to use sub-custodians, such as another bank, to either source or store the gold for them. This obviously exposes you to additional risks.

At the end of the day, you have to trust that NewGold has a claim against the custodian and will be able to recover in case anything goes wrong.

  • Tradability

If you are holding gold ETF for short periods of time, the spread is likely your main costs. Currently, NewGold has an expense ratio of 0.4%. This means you incur KES 4, 000 for every KES 1 million investment.

The bid-ask spread for this is unattractive and makes trading expensive largely due to infrequent counter trades.

The above cost is as a result of holding gold ETF for small periods of time, being small and illiquid.

In short, holding gold for short periods of time is expensive.


A Case for Cryptocurreny Trading

While custody and tradibility are obviously big risk factors in gold trading, they are the very same reasons that make cryptocurrency so attractive as alternative investments.

Cryptocurrencies allow you to own and hold your assets, either on a private wallet or an exchange wallet, accessible anytime and anywhere. A lack of a central authority eliminates the need for a trustworthy entity.

Cryptocurrencies are also one of the most tradable alternative assets out there. While crypto markets are volatile due to liquidity issues, this is quickly changing as more exchanges and players enter the market.

Speculation and leveraged trading in cryptocurrency markets have brought the same tools and resources from the traditional world into the crypto space helping traditional investors and traders to get onboarded quickly.


This is an excerpt from a post published on Business Daily Africa


Disclaimer: This post is not investment advice. You should not construe the above information or other material as legal, tax, investment, financial, or other advice.



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