ETF QUESTIONS

Is Deloittes report wrong in stating that the Authorized Participants can contribute borrowed assets to
ETFs in general.
Is there anything in the Authorized Participant Agreement that would prevent an Authorized Participant
from contributing leased bullion to the ETF?
If the bullion is not leased or borrowed what is the financial motivation for the Authorized Participant to
purchase bullion at NAV, get creation units at NAV and then sell those units to investors at NAV ?
Where is the profit?
Does a typical lease agreement with a central bank give up title to the bullion? With lease rates at under
1% this seems like a very risky proposition for the central bank. If the bank did not maintain ownership
rights on the leased gold then in the event of an insolvency of an Authorized Participant the central bank
would have lost its gold for a 1% fee.
If title is transferred in a lease agreement how would you explain that the Central Bank of Portugal was
able to recover tonnes of gold that it leased to Drexel Burnham after Drexel became insolvent?
If title is in fact transferred to the lessee from the central bank how can the central bank still show the
gold as part of its assets and not simply a receivable from the lessee?
Why use the term leasing at all then as typical lease transactions do not transfer title but simply give a
right to use the asset.
If the leased bullion is in fact sold and title transferred then how do you reconcile the GFMS and CPM
supply/demand statements. This would require that the leased gold be added to supply and the only
adjusting factor could be the investment demand.
Will the ETF be able to maintain a close relationship to NAV if the Authorized Participants are forced to
return the leased bullion. In a situation of rapidly rising prices, or bullion shortages, the price of ETF
shares could drop while the price of physical bullion rises. If the bullion is simply returned to the original
Lessor then it will not result in any downward price pressure as it is when it is sold.
In the Authorized Participant Agreement Section 16, the Authorized Participant warrants that the Trust
will acquire good and unencumbered title to the gold and not that it has good and unencumbered
ownership of the gold. This is a very unusual wording to warrant what the other party will get rather
than warrant what it is you have. In contrast, in section 8 dealing with redemption of units the
Authorized Participant warrants that it owns the units outright and that such baskets of units have not
been loaned or pledged and are not part of a repurchase agreement or securities lending agreement.
Why not have the same wording for the gold bullion as you do for redemption?
While the Authorized Participant is obligated to contribute London Good Delivery Bars, under risk
factors in the prospectus, there is a risk that the bars in the trust may not meet Good Delivery
Standards. This is because neither the custodian nor the trustee is certifying the quality or the quantity
of the bars it receives.
While the trust is not beneficiary of any insurance that the custodian may hold there is the risk that the
Trustee and Custodian may not be able to take legal action against subcustodians. The insurance of the
custodian will not be of any use.
In the case of the custodian becoming insolvent and at the same time bars are missing the insurance
proceeds will not do the ETF investors any good.
The issue of multiple claims of ownership comes from the fact that ETF units can be sold short whereas
mutual funds cannot be sold short. As a result you only have one owner of the units.
Under strategy it states that ETF units will provide investors with a simple and cost effective means of
gaining investment benefits similar to those of holding allocated bullion. This is not the same as
actually owning bullion.