Gold backed assets set to make debut on NSE

Money Markets

Nairobi Securities Exchange staff monitors electronic trade. FILE PHOTO | NMG 

By CHARLES MWANIKI

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Summary

• The trading of exchange traded funds (ETF) in Kenya will begin on Monday.
• On Thursday, gold retailed in the international markets at $1,249.30 (Sh128,540) per 100 troy ounces, meaning an ounce would be equivalent to Sh1,285.
• At a minimum traded amount of 100 units that the NSE rules have set, one would need to... fork out at least Sh120,000 to access the ETFs, potentially locking out many retail investors.

Kenyan investors will from Monday be able to buy a unit of gold backed assets at the Nairobi Securities Exchange (NSE) for about Sh1,200, kicking off the trading of exchange traded funds (ETF) in the country.

The debut ETF is being issued by South African firm NewGold Issuer Limited, which said it will use the proceeds of the issue to buy gold bullion that will back the securities.

The ETF’s pricing is based on real time price of gold in international markets — where one unit is pegged on the price of a troy ounce of gold — and the prevailing shilling/dollar exchange rate.

On Thursday, gold retailed in the international markets at $1,249.30 (Sh128,540) per 100 troy ounces, meaning an ounce would be equivalent to Sh1,285.

At a minimum traded amount of 100 units that the NSE rules have set, one would need to fork out at least Sh120,000 to access the ETFs, potentially locking out many retail investors.

That pricing would make the new ETF the second most expensive security on the NSE behind the seldom traded share of Kurwitu Ventures.

“The price means that it is likely to be marketed to institutional investors rather than retail buyers. Asset managers sitting on huge capital now have an additional asset class to invest, one that they can use as a safe haven for their assets in case of market shocks,” said ABC capital analyst Raymond Kipchumba.

In the Johannesburg Stock Exchange, where the ETF had its primary listing in 2004, a unit sold at an average of 149 Rand or Sh1,209 this week.

An ETF is a fund into which investors contribute money that goes into buying securities that make an index or a defined group of securities — such as banking or insurance stocks — put together.

The underlying asset can also be a commodity, such as gold. The investors do not own the commodity directly, but instead hold shares in the ETF whose value goes up or down in tandem with the value of the underlying asset.

NewGold Plans to use the proceeds of the NSE ETF issue to buy gold bullion, and is issuing its securities as debentures.

The issue has opened the door to local investors wishing to participate in the gold market, where they have previously had to either trade in the commodity in its physical form (bullion) or do so through offshore markets.

It also as as a hedge against inflation, given that the pricing takes into account fluctuations of exchange rate and the asset is valued in dollars.

“The currency aspect makes it a risk mitigant of sorts, hedging against inflation and depreciation. The instrument has also come into the market at a good time, given that the country is looking at election risk and the market needed a new product to re-energise investors,” said Mr Kipchumba.