BMO gold product takes aim at big ETF market, new investors

NEW YORK (Reuters) - Bank of Montreal has launched a new way for investors to buy physical gold, offering greater security than private storage while going head to head with the $60 billion exchange-traded fund industry.

The launch comes at a critical time for bullion, with investors in recent weeks making a tentative return to the market after a prolonged exodus as the oil rout and euro zone instability reignite gold’s appeal as a safe-haven investment.

The first of its kind in the United States, the Canadian bank’s new gold deposit receipt program (GOLDR) allows investors to buy and sell shares that are backed by physical bullion stored in Canada and which track the price of spot gold.

Each share represents one ounce of gold, which on Tuesday was worth about $1,260. The bank said the program will issue $500 million worth of shares to start with.

The program will be similar to gold ETFs, which were created about ten years ago and have become a popular vehicle for retail and institutional investors who do not want to take physical delivery of bullion.

Unlike ETFs that trade at either a discount or premium to the spot gold market, GOLDRs will track the spot price. BMO will charge a one-time upfront fee of 2 percent and allows gold to be delivered in amounts as small as 1 ounce, the bank said.

The product is aimed at four types of investor - private ones that store their bullion in vaults, broker dealers, investment advisors as well as existing users of ETFs.

“You will probably see new cash come into this product and I will not be surprised at all to see interest that is currently held with private storage facilities, enter this type of buying,” Simon Carling, managing director of Financial Products Investor Solutions for BMO Capital Markets, said in an interview.

Spot gold prices rose 8 percent in January, posting their best month in two years even as the dollar remains strong and the U.S. Federal Reserve reins in its years-long bond-buying stimulus program.

Total holdings in gold ETFs have recovered to around 46 million ounces, worth $58 billion based on Tuesday’s prices, up from near five-year lows of around 44.3 million ounces two weeks ago.

GOLDRs are SEC-registered securities issued by the Vaulted Gold Bullion Trust and are Depository Trust Company eligible, BMO said.

Reporting by Marcy Nicholson