For the first time, investors can now trade in gold at the Nairobi Securities Exchange (NSE), after the Capital Markets Authority approved the listing of the Barclays NewGold Exchange Traded Fund (ETF).

The ETF is being issued by South African firm NewGold Issuer Ltd, which is represented in Kenya by Barclays Financial Services Ltd (BFSL), owned by Barclays Bank of Kenya (BBK).

The head of markets at BBK, Anthony Kirui, said that CMA had approved the listing of 400,000 gold bullion debentures, each equivalent to 0.01 of an ounce of gold.

READ: NSE firms get nod to cross-list exchange traded funds in East Africa

By Friday, March 24, most listed commodity trading platforms were quoting an ounce of gold at $1244.50. Already Citi Group has predicted that gold prices will reach a high of $1,300 per ounce this year.

On March 27, when the ETF listed, retail investors could only place an order of 100 ETF shares from BFSL.

Factoring in the settlement date of security transactions (T=3 day rule), it’s only from March 30 that brokers will be able to offer smaller shares (under 100) to these retail investors as the secondary market will now be active, having received the shares in their accounts, allowing them to trade.

However, anyone who will want to purchase or sell directly from the market maker will have to buy a minimum of 100 shares of the ETF.

The listing comes at a time when there has been a discovery of large gold deposits in western Kenya, and Uganda recently launched a gold refinery. Gold is the key foreign income earner for Tanzania and the Democratic Republic of Congo.

READ: Acacia gold project in Kenya to kick off in 2022

In its 2016 annual results, Acacia Mining, Tanzania’s largest gold producer, announced that it produced 829,705 ounces that year, up from 731,912 ounces in 2015.

Gold has delivered consistently higher returns than stocks since the global financial crisis of 2008. The ETF will now allow investors to buy gold without having to physically store it, incurring lower taxes than physical gold and carrying lower risks than equity investments.

According to Michael Mgwaba, the head of ETFs at BAGL, the Fund will be based on the real time value of the underlying gold that they track.

“The NewGold ETF will be denominated in Kenya shillings, and its price will be based on the KES equivalent of the prevailing dollar international market price of gold. The price movement of the ETF will be determined by the price movement of gold. There will be no intra-day price limit on the ETF and there will not be price limits between trading sessions,” Mr Mgwaba told The EastAfrican.

The ETF will trade in the same manner as a normal equity security and will be subject to similar tax treatment. Disposals of the gold bullion debentures will not attract capital gains tax in Kenya, in line with the treatment given to listed instruments. Each security references approximately 0.01 ounces of gold bullion.

Primary listing
The ETF, which has a primary listing in South Africa at the Johannesburg Stock Exchange, already has secondary listings in Nigeria, Ghana, Botswana, Mauritius and Namibia, with other commodities outside of gold being traded.

Data from Bloomberg Intelligence shows that gold prices have risen by more than nine per cent this year. Investors pumped in more than $3 billion into long-only commodity-linked ETFs last month, driven mainly by investment in precious metals. Gold does not produce yields so investors have to rely on price appreciation for returns.
“We have structured these products as an open-ended fund, allowing investors to buy as many shares as they want. It will be the first time investors in the region will have an alternative to diversify their risks and hedge against currency and inflation swings, which often affects the equity markets,” Mr Mgwaba said.

Secure depository
NewGold EFT is listed on the Johannesburg Stock Exchange (structured as a debenture) in which each NewGold security is held in a secure depository in London on behalf of investors.

“Each security is backed by physical gold, and the value of a NewGold ETF security will rise or fall in accordance with fluctuations in the underlying currency price of gold bullion,” Mr Mgwaba said.

NewGold charges an annual fee of 0.4 per cent of the value of the gold bullion held in custody in order to meet the operating expenses of the ETF.

NewGold launched on the JSE in 2004, and last week it was the seventh largest gold ETF in the world with 832 tonnes valued at $32 billion.
Last October, the bank launched BFSL, which will be BAGL’s designated broker.

“If the price is accepted by the investor’s broker (either BFSL or other local stock broker representing their own respective clients), then BFSL matches the agreed transaction on behalf of BAGL on CDSC no differently than any other local security,” Mr Kirui said, adding that only the equity stock held by BAGL can be traded.

How to buy the ETF:

1. Retail investors approach their respective brokers and make an order
2. The brokers call the market maker (Barclays Financial Services Ltd), and ask for a price higher than what the market makers will be offering
3. If the two agree on the price that the market maker is offering, then the trading requests are captured to independent execution systems, where they are matched by size and price
4. Once the confirmation is received, BFSL collates orders on behalf of the market and calls Barclays Africa Group Ltd Commodity ETF Trading to request bid and offer pricing
5. If the price is accepted by the investor’s broker, BFSL then matches the agreed transaction on behalf of BAGL, no differently than any other local security
6. The order is approved and the T+3 settlement rule is then applied.
7. The shares will then be transferred to the broker’s Central Depository System (CDS) account for secondary trading.