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The ETF arbitrage opportunity for PurePlay® Instrument Issuers in commodities where there are certain types of ETFs is a valuable resource for Issuing Producers, particularly Producers of gold, platinum and palladium where the ETFs are well-established. As with all scarce resources this advantage will yield highest benefits to the early birds.

The low hanging fruit are the ETFs with the highest cost structures as those ETFs will yield the largest arbitrage profits. Compare for example the cost structure of SPDR GLD ETF at around 0.95% per annum against the cost structure of the ABSA NewGold ETF at around 1.85% per annum. Arbitrageurs using the ABSA NewGold ETF will gain almost double the arbitrage profit compared to those using the SPDR GLD.  However even the SPDR GLD ETF produces attractive arbitrage opportunities. It is expected that these differences will eventually disappear and then the early bird advantage would be gone.

How does the ETF/PurePlay® Instrument arbitrage work?

Pricing of both PurePlay® Instruments and the ETF are at the spot price of the commodity in which the PurePlay® Instrument is denominated and issued. A PurePlay® Gold Instrument will be at (or eventually slightly above) the spot gold price and a PurePlay® Platinum Instrument will be at (or eventually slightly above) the spot platinum price. Arbitrages will generally exist between the PurePlay® Instrument and an Exchange Traded Fund (“ETF”) in the same commodity as the instruments are both investments in that commodity in storage. The PurePlay® Instruments are superior in cost efficiency and generally offer a superior storage risk. It follows that there will be a positive arbitrage in favour of the PurePlay® Instrument compared to a similar commodity ETF instrument for a similar quantity of the commodity.

We use gold in the following example for ease of reference but the principles will be the same across all fungible commodities.

  1. A gold EFT instrument purchased today will be eroded by costs of about 1.5% on average per annum and actual physical gold will be sold from the gold held in storage to pay for the costs. Thus an investment of 100 ounces gold in a gold ETF will be eroded to only 85 ounces of gold over a ten year period (a falling gold price will see a higher number of ounces eroded and a rising gold price will see a lower number of ounces eroded).
  2. The PurePlay® Gold Instrument for a similar 100 ounces of specified gold will deliver 100 ounces of gold to the holder in 10 years.
  3. The holder of a PurePlay® Gold Instrument will therefore have 15 ounces of gold more than the Investor in a gold ETF instrument after 10 years or 1.5 ounces more on a per annum basis.

Arbitrage profits can be made in the event that the PurePlay® Gold Instrument’s price does not reflect the superior cost efficiency, meaning that the PurePlay® Gold instrument is trading at a discount to the spot gold price or at a discount to the gold ETF Instrument (gold ETF instruments are managed to trade at the spot gold price).

  1. Say that the PurePlay® Gold Instrument is trading at a 5% discount to the spot gold price. We will continue to use the 100 ounces example.
  2. Sell the gold ETF instruments short representing 100 ounces gold and buy PurePlay® Instruments for 100 ounces at a 5% discount which yields an immediate 5% profit while price risks are covered 100 ounces for 100 ounces. Note that when a Producer both issues and buys the PurePlay® Instrument then the PurePlay® Instrument will go into the “Short Gold ETF/Long PurePlay® Gold Instrument arbitrage” and the Producer will receive the cash for the PurePlay® Gold Instrument sold. The insightful Producer Issuer will realise that the arbitrage can “fill in” for Investors from time to time and it can deploy the arbitrage in managing its issuance program.
  3. The short gold ETF will lose another 1.5 ounces every year for a total of 15 ounces over 10 years which will be additional arbitrage profits.
  4. Collect 100 ounces at the end of 10 years under the PurePlay® Gold Instrument, sell the 100 ounces, settle the short gold ETF instruments now worth only 85 ounces and pocket the 15 ounces arbitrage profit.
  5. Thus the trader of this arbitrage collected a 5% cash profit upfront and collected a 15 ounce arbitrage profit at the end. The net arbitrage profit will have to include the trader’s trading costs and the carry cost of the short but these are minimal and will not have a material impact on the arbitrage profit.  

Patents and Trade Marks

The Intellectual Property of PurePlay Holdings (Pty) Ltd is protected by world-wide pending Patents.

Trademarks awaiting registration are PurePlay™, Nature’s Vault™, As Good as Gold™ and Sp☼t True Value™.

Contact Details

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