U.S. patent application number 14/133683 was filed with the patent office on 2014-09-18 for deliverable commodity investment vehicle.
This patent application is currently assigned to Merk Investments LLC. The applicant listed for this patent is Merk Investments LLC. Invention is credited to Alexander Merk.
Application Number | 20140279355 14/133683 |
Document ID | / |
Family ID | 49840975 |
Filed Date | 2014-09-18 |
United States Patent
Application |
20140279355 |
Kind Code |
A1 |
Merk; Alexander |
September 18, 2014 |
DELIVERABLE COMMODITY INVESTMENT VEHICLE
Abstract
A supply of a commodity is owned by an investment vehicle. A
sponsor of the investment vehicle receives a delivery application.
A custodian stores the supply of the commodity as a collection of
first physical units. A commodity dealer specializing in trading
the commodity agrees to conduct trades with the sponsor to convert
a first quantity of the supply for a second quantity of the
commodity. A broker dealer trades shares of the investment vehicle.
The delivery application is provided by a shareholder, and
specifies a physical format for the second quantity of the
commodity.
Inventors: |
Merk; Alexander; (Palo Alto,
CA) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
Merk Investments LLC |
Palo Alto |
CA |
US |
|
|
Assignee: |
Merk Investments LLC
Palo Alto
CA
|
Family ID: |
49840975 |
Appl. No.: |
14/133683 |
Filed: |
December 19, 2013 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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13839463 |
Mar 15, 2013 |
8626641 |
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14133683 |
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Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 40/00 20130101;
G06Q 40/04 20130101 |
Class at
Publication: |
705/37 |
International
Class: |
G06Q 40/04 20120101
G06Q040/04 |
Claims
1-20. (canceled)
21. A method for sponsoring a deliverable commodity investment
trust comprising: arranging for the creation of the deliverable
commodity investment trust such that the deliverable commodity
investment trust: (i) holds a commodity and (ii) issues shares
representing a unit of fractional undivided interest in the
deliverable commodity investment trust; receiving a delivery
application from the trust investor that includes: (i) a desired
specification for a physical delivery of the commodity and (ii) a
number of the shares to be surrendered in exchange for the physical
delivery of the commodity; requesting a trust custodian to engage
in an over-the-counter transaction with a dealer to convert the
commodity into the desired specification for the physical delivery
of the commodity; and arranging for the physical delivery of the
commodity from the dealer to the trust investor.
22. The method of claim 21, wherein: the commodity is gold; the
desired specification specifies that the gold must be gold coins or
gold bars; the dealer is a precious metals dealer; and the
commodity is held by a custodian.
23. The method of claim 21, wherein the physical delivery of the
commodity is via a conventional shipping carrier.
24. The method of claim 21, further comprising: maintaining a
website for the deliverable commodity investment trust; and
pre-approving the delivery application before the delivery
application is submitted to a trustee of the trust; wherein the
website includes a calculator for calculating the number of shares
to be surrendered to minimize a cash component of the exchange of
the shares for the physical delivery of the commodity.
25. The method of claim 24, wherein: the calculator calculates the
number of shares to be surrendered based at least in part on an
accrued cost for holding the commodity, a current price of the
shares, and the desired specification for the physical delivery of
the commodity.
26. The method of claim 24, further comprising: instructing the
trust investor to utilize the calculator to calculate the number of
shares for the delivery application.
27. The method of claim 24, wherein: pre-approval of the delivery
application is contingent upon the number of shares minimizing the
cash component of the exchange of the shares for the physical
delivery of the commodity.
28. A method for sponsoring a deliverable commodity investment
trust comprising: arranging for the creation of the deliverable
commodity investment trust such that the deliverable commodity
investment trust: (i) holds a commodity and (ii) issues shares
representing an interest in the deliverable commodity investment
trust; maintaining a website for the trust that includes a
calculator for estimating a physical quantity of the commodity and
an estimated quantity of cash that can be exchanged for a number of
shares; receiving a delivery application from a trust investor that
includes: (i) a desired specification for a delivered physical
quantity of the commodity and (ii) the number of shares as
calculated by the calculator; and pre-approving the delivery
application before the delivery application is sent to a trustee of
the deliverable commodity investment trust to conduct an exchange
of the number of shares for the delivered physical quantity of the
commodity and a final quantity of cash.
29. The method of claim 28, wherein: the calculator calculates the
number of shares, and the number of shares is a minimum number of
shares required to obtain the physical quantity of the commodity;
and the calculator calculates the number of shares based at least
in part on an accrued cost for holding the commodity, a current
price of the shares, and the desired specification for the
delivered physical quantity of the commodity.
30. The method of claim 28, wherein: the desired specification for
the delivered physical quantity of the commodity specifies that the
physical quantity of the commodity must be London Good Delivery
Bars.
31. The method of claim 28, further comprising: collecting a
sponsor fee via an allocation of additional shares representing an
interest in the deliverable commodity investment trust.
32. The method of claim 28, further comprising: requesting a trust
custodian to engage in an over-the-counter trade with a precious
metals dealer to convert the commodity to meet the desired
specification; wherein the commodity is gold and the desired
specification specifies that the gold must be gold coins or gold
bars.
33. The method of claim 32, wherein: the over-the-counter trade
involves an exchange of unallocated gold for a number of physical
gold coins or gold bars.
34. The method of claim 33, wherein: the delivered physical
commodity is delivered via a conventional shipping carrier.
35. A deliverable commodity trust administration system comprising:
a trust custodian to store a commodity physically on behalf of the
trust; a trustee to coordinate the exchange of a physical quantity
of the commodity for shares of the trust; a trust sponsor to
receive and pre-approve a delivery application specifying: (i) a
desired specification for the physical quantity of the commodity
and (ii) a number of shares to be exchanged for the physical
quantity of the commodity; and a dealer to engage in an
over-the-counter trade with the trust custodian, the
over-the-counter trades converting the commodity into the desired
specification.
36. The system of claim 35, further comprising: a conventional
shipping carrier to deliver the physical quantity of the commodity
to an investor; wherein the investor provides the delivery
application to the trust sponsor.
37. The system of claim 35, wherein: the desired specification
specifies that the physical quantity of the commodity must be gold
coins or gold bars; the commodity is stored by the trust custodian;
and the over-the-counter trade converts the commodity into the
desired specification by exchanging unallocated gold for the
physical quantity of the commodity.
38. The system of claim 35, wherein: the trust sponsor
administrates a website with a calculator for estimating the
physical quantity of the commodity and an estimated quantity of
cash that can be exchanged for the number of shares.
39. The system of claim 35, wherein: the trust sponsor
administrates a website with a calculator for calculating a minimum
number of shares that can be exchanged for a desired physical
quantity of the commodity.
40. The system of claim 39, wherein: pre-approval by the trust
sponsor is contingent upon the number of shares to be exchanged for
the physical quantity of the commodity from the delivery
application being equivalent to the minimum number of shares
calculated by the calculator.
Description
BACKGROUND OF THE INVENTION
[0001] Commodities provide an appealing investment class for
conscientious investors that are interested in diversifying their
portfolio. Unlike equities, bonds, and currencies, commodities do
not run the risk of default as they have intrinsic value. Gold, for
example, is one of the most ancient and reliable store houses of
value known to humankind. Furthermore, commodity prices exhibit one
of the hallmarks of investor diversification as changes in their
prices may counteract changes in the value of other asset classes.
As such, commodities may be considered a safe haven investment,
means of diversifying an investment portfolio, and hedge against
inflation.
[0002] The key drawback to commodities as an investment is the fact
that their physical nature makes them somewhat incompatible with
the speed and interconnectivity of the modern financial system. As
a result, a common substitute for direct investment in a commodity
was to invest in equities associated with producers of that
commodity. For example, an investor interested in investing in gold
would invest in gold mining companies. However, this solution
partly defeats the purpose of investing in commodities in the first
place because an investor is then exposed to an array of other
risks, including the risk of the producers defaulting; as such, the
use of the investment as a diversifier is thereby somewhat
mitigated. Institutional investors have also been able to invest in
commodities through access to more complex financial products,
including financial derivatives, such as futures; however, these
financial products have not been traditionally available to retail
investors. Ordinary retail investors have historically been
prevented from investing directly in commodities.
[0003] Recently, financial products that allow retail investors to
invest in gold directly have become more readily available through
the use of securitized pools of gold. Through securitization, the
value of a commodity can be disassociated with the physical nature
of the commodity. Shares of a pool of the commodity can be traded
so that a transfer of the shares is the legal equivalent of the
transfer of a physical portion of that common pool from one party
to another. These financial products, such as the Merk Gold Trust,
show significant promise for enabling the retail investors of the
world to invest in commodities as a pure asset class--wholly
distinct from equities and bonds. However, financial products in
this class can exhibit significant drawbacks that prevent them from
reaching their full potential.
[0004] The financial products at issue have at least three main
drawbacks. First, they are plagued by the fact that taking delivery
of a commodity is prohibitively expensive and is in some cases
completely impossible. This is not a trivial problem. If a user is
not able to take possession of the commodity in the pool, their
ownership of the commodity may be considered a legal fiction. No
matter how strongly that fiction may be enforced, it is not true
money-in-the-hand ownership. Second, the investment vehicles
holding commodities generally store commodities using a format that
is incompatible with how a retail investor would prefer to hold the
commodity. Taking gold as an example, the commodity here is stored
in the institutional system in the form of London Good Delivery
Bars which are irregular in terms of both size and purity. It is
therefore difficult for a retail investor to serve as an adequate
custodian of these bars, and the liquidity of the bars drops
precipitously when they are removed from the institutional system.
When the bars are input into the institutional system, their weight
and purity is determined and guaranteed, and that guarantee
attaches to the bar as it is transferred from one institution to
the next; the industry refers to this as the "Chain of Integrity".
The same is not true for individual investors, which is why
standardized coins or bars are preferred. Third, without the
ability to take delivery of the gold, retail investors may never be
convinced that the pools they are investing in actually have the
commodity they say they do. To the extent large institutions can
take delivery of gold, custodians of pools of commodity usually
only deliver the commodity "unallocated" which means that ownership
is not assigned to a specific physical unit, raising questions as
to whether stake holders in the administration of investment
vehicles holding commodities are keeping adequate track of the
perceived and actual amount of the commodity in the pool. Not only
that, but unallocated commodities again have counterparty risk, as
they represent a claim against the institution holding the
commodity, not an ownership of the commodity itself; the
institution might, in turn, lease out the commodity, which is why
unallocated gold, for example, is also referred to as "paper gold",
as well as have numerous institution-specific liabilities. In the
case of gold, only gold held on a segregated, "allocated" basis is
an ownership claim of a specific gold bar. Such pools might have
their commodity holdings audited; but without the ability to take
delivery of the commodity, such audits do not necessarily alleviate
the concern of investors that the commodity is indeed held by the
pool.
SUMMARY OF INVENTION
[0005] In one embodiment of the invention, a system is provided for
delivering a commodity to a delivery applicant. The system includes
a trust for issuing shares that represent an interest in the trust,
and for owning a supply of the commodity. The system also includes
a trust custodian account for storing at least a portion of the
supply where the supply has a first physical composition. The
system also includes a commodity dealer account for conducting
over-the-counter trades with the trust custodian account. The
over-the-counter trades convert the first quantity of the supply in
the trust custodian account to a second quantity of the commodity.
The delivery application form is used by the delivery applicant
shareholder to selectively define a conversion specification that
defines a physical composition for the second quantity.
[0006] In another embodiment of the invention, a system is provided
for receiving a fee for providing a conversion of a commodity. The
system includes a supply of a commodity owned by an investment
vehicle that is configured to be owned by a shareholder. The system
also includes a sponsor for establishing the investment vehicle,
collecting the fee, and receiving a delivery application. The
system also includes a custodian for storing the supply of the
commodity that is stored as a collection of first physical units.
The system also includes a commodity dealer specializing in trading
the commodity that has agreed to conduct trades with the sponsor to
convert a first quantity of the supply for a second quantity of the
commodity. The system also includes a broker dealer for trading
shares of the investment vehicle. The delivery application is
provided by the shareholder, and specifies a physical format for
the second quantity of the commodity. The fee is collected from the
shareholder after the shareholder completes the delivery
application.
[0007] In another embodiment of the invention, a method is
provided. The method includes arranging for the creation of a trust
that has shares that reflect a performance price of a commodity
less the operation expenses of the trust. The commodity is stored
by a custodian and the shares are traded by a broker. The method
also includes reviewing a delivery application that is provided by
a delivery applicant and contains a commodity delivery
specification. The method also includes pre-approving the delivery
application. The method also includes coordinating with a commodity
dealer to fulfill the commodity delivery specification. The method
also includes arranging for the delivery of a customer commodity
delivery to the delivery applicant that matches the commodity
delivery specification. After the pre-approving step of the method,
the custodian transacts with the commodity dealer to convert the
commodity to the customer commodity delivery.
BRIEF DESCRIPTION OF THE DRAWINGS
[0008] FIG. 1 illustrates a block diagram of a system for providing
delivery of a precious metal to a delivery applicant shareholder
that is in accordance with embodiments of the present
invention.
[0009] FIG. 2 illustrates a flow chart of a method of accepting and
processing a delivery application that is in accordance with
embodiments of the present invention.
[0010] FIG. 3 illustrates a flow chart of a method of delivering a
quantity commodity to a delivery applicant that is in accordance
with embodiments of the present invention.
[0011] FIG. 4 illustrates a flow chart of a method of delivering a
quantity of a commodity in a specified format to a delivery
applicant that is in accordance with embodiments of the present
invention.
[0012] FIG. 5 illustrates a flow chart of a method conducted by a
sponsor of a deliverable commodity investment vehicle that is in
accordance with embodiments of the present invention.
DETAILED DESCRIPTION OF THE EMBODIMENTS
[0013] Reference now will be made in detail to embodiments of the
disclosed invention, one or more examples of which are illustrated
in the accompanying drawings. Each example is provided by way of
explanation of the present technology, not as a limitation of the
present technology. In fact, it will be apparent to those skilled
in the art that modifications and variations can be made in the
present technology without departing from the spirit and scope
thereof. For instance, features illustrated or described as part of
one embodiment may be used with another embodiment to yield a still
further embodiment. Thus, it is intended that the present subject
matter covers all such modifications and variations within the
scope of the appended claims and their equivalents.
[0014] The invention relates generally to systems and methods for
investing in commodities, and more specifically to commodity
investment vehicles offering a conversion or delivery feature.
[0015] On Apr. 20, 2012, the assignee of the present application at
the time of filing--Merk Investments LLC--filed an S-1 with the SEC
registering a financial product. The exact name of the registrant
in that filing was: Merk Gold Trust. The contents of this document
is incorporated herein by reference in their entirety.
[0016] Embodiments of the present invention provide a deliverable
commodity investment vehicle. An investment vehicle including both
the securitization of a commodity, and the option to take physical
delivery of that commodity on demand on any business day, will
provide owners with both a convenient and liquid method of
investing in a commodity, while at the same time providing the
greater certainty accompanying actual physical ownership. If
delivery includes the ability to convert the commodity into a
different--and more desirable--format, problems with the lack of
compatibility of the institutional and retail markets for
commodities can likewise be alleviated. Embodiments disclosed
herein provide these and other benefits.
[0017] FIG. 1 illustrates a block diagram of a system 100 for
providing delivery of a commodity, for example gold, to a delivery
applicant. The delivery applicant is a pro-rata investor in an
investment vehicle. System 100 also enables a sponsor of the
investment vehicle to collect an exchange fee. System 100 comprises
trust 101. Trust 101 issue shares 101s in baskets of a
predetermined amount in return for deposits of the commodity on
which the investment vehicle is based; references to trust 101
herein, may refer to the trust's trustee as agent for the trust.
Note that in the situation in system 100, the investment vehicle is
an exchange traded fund utilizing a trust, but the investment
vehicle could be any other type of registered or non-registered
investment vehicle, as well as exchange traded or non-exchange
traded vehicle. These include vehicles such as open-end or
closed-end investment companies (also known as mutual funds and
closed-end funds), commodity pools, exchange traded notes (ETNs),
exchange traded products (ETPs), futures funds, derivative funds,
fund of funds, limited or general partnerships, master-limited
partnerships and any other legal construct capable of a serving as
a potential vehicle for investment, including legal constructs that
do not yet exist.
[0018] The shares 101s are generally issued to a broker 102.
Although only one broker is shown, multiple brokers can be involved
with system 100. Shares 101s are provided to broker 102 in response
to broker 102 delivering a volume of a commodity and assuring that
the commodity is deposited with a trust custodian 103 and held in a
trust custodian account. The trust custodian 103 may be a large
institutional commodity dealer such as an international bank or, in
the case of gold, a bullion dealer capable of clearing transactions
with the London Bullion Market Association (LBMA). The shares 101s
that are provided to broker 102 represent an ownership interest in
the trust. An asset of the trust is a supply of the commodity on
which the investment vehicle is based. For example, the main asset
could be a supply of gold held by trust custodian 103. Generally
the commodity will be stored as a collection of physical units
having a physical composition. Examples of physical units include
barrels of oil, bars of gold, or bars of silver. Examples of a
physical composition include West Texas Intermediate or London Good
Delivery Bars. An exchange of shares 101s represent a transfer of
the ownership of a portion of the commodity stored by trust
custodian 103.
[0019] In the example where multiple brokers 102 compete with one
another (or a single broker 102 has a contractual obligation),
shares 101s can trade in the marketplace at very low spreads. This
is because such brokers 102 compete for the business of a) retail
investors buying and selling shares of the trust b) are able to
receive new shares of trust 101 at the trust's net asset value in
exchange for supplying commodities to the trust; and c) are able to
hedge their own risk most efficiently because trust 101 holds a
commodity in a composition that is readily hedged through market
instruments. But, in addition to the efficiency and convenience
described above, an investor and delivery applicant 108 in system
100 can file a delivery application 107 and take delivery of the
commodity underlying the shares in different compositions. While
there may be fees involved for delivery applicant 108 to exchange
shares 101s for the commodity in physical form, delivery applicant
108 is able to purchase the shares through broker 102 easily and
cost-effectively at a price that reflects the value of the
commodity held by the trust, and then--on any business day in the
future--have the choice to file delivery application 107 and take
physical possession of the commodity in a format convenient to
delivery applicant 108. Previously, it was not possible for retail
investors to access both institutional efficiency, as well as the
convenience of taking delivery of physical commodity of a
composition that's tailored to the needs of such retail investor.
As a concrete example, it is possible for the trust to hold London
Good Delivery Bars that can be invested in easily and cost
effectively through the trust, but investors may choose to take
delivery of such gold in the form of, for example, American Gold
Eagle coins.
[0020] Trust sponsor 109 is set to conduct over-the-counter (OTC)
trades 106 with commodity dealer 105. These OTC trades exchange a
first quantity composition of a commodity in the trust custodian
account for a second quantity composition of the commodity with the
same underlying commodity content. The first and second quantities
of the commodity can have different physical compositions. For
example, the first physical composition could be London Good
Delivery Bars while the second composition could be American Gold
Eagle Coins. In order for the OTC transaction to settle, trust
custodian 103 delivers an agreed upon quantity of the commodity to
the commodity dealer 105. Commodity dealer 105 forms an integral
part of system 100. Commodity dealer 105 needs to be able to engage
in a transaction with trust custodian 103, but may be a commodity
dealer specializing in trading said commodity in compositions
desirable in the retail market. Therefore, commodity dealer 105
provides a valuable service because trust custodian 103 may, for
example, be an institutional service provider that is not able to
serve the retail commodity market; and broker 102 may, for example,
be a FINRA registered broker-dealer that is prevented by regulation
from physically handling commodities such as gold. Commodity dealer
105 is therefore instrumental in allowing system 100 to provide a
conversion capability to the associated investment vehicle.
[0021] Delivery application 107 allows a delivery applicant 108 to
request delivery of a physical quantity of the commodity underlying
the investment vehicle. The delivery application 107 may be allowed
to be submitted on any business day. Delivery application 107 may
allow a delivery applicant to specify a conversion specification
that defines the physical composition of the commodity quantity 110
that delivery applicant 108 desires to receive. In examples where
the commodity is gold, the commodity quantity 110 could take the
format of London Good Delivery Bars. However, in other examples,
the commodity quantity 110 will be of a format that is more
desirable to retail investors such as standardized gold bars of a
set purity and weight or gold coins minted by a national
government. The availability of these various physical compositions
is constrained by the types of physical compositions available to
commodity dealer 105 to ensure prompt delivery of the commodity in
return for surrendering shares to the Trust. Turning again to the
example of gold as the commodity, the physical composition of the
commodity as stored with the trust custodian 103 may be, as
described previously, London Good Delivery Bars, and the physical
composition of the commodity as requested by the delivery
application 107 may be American Gold Eagle Coins. The benefit of
this particular conversion is that the commodity changes from a
composition that cannot be delivered to a retail investor by a
common delivery service, nor to a residential address to one which
is amendable to delivery by a common delivery service 111 to a
delivery applicant's home address. An example of a common delivery
service 111 includes FedEx or UPS. In contrast, London Good
Delivery Bars can only be delivered by armored transportation and
can only be delivered to trusted addresses, i.e. not to a
residence.
[0022] The benefit of the conversion provided by commodity dealer
105 is illustrated by the following discussion. While the commodity
is stored with trust custodian 103 it can be stored in a physical
composition that trades close to the spot price of the commodity.
Therefore, the investment vehicle retains valuable liquidity and
transaction costs are decreased. At the same time, a retail
investor such as delivery applicant 108 can obtain delivery of the
commodity in a format for which they can serve as an adequate
custodian and from which they can derive maximum value and security
from physical ownership. It is only when the investor requests
physical delivery that the investor incurs the additional costs of
trading in physical formats of the commodity that are less amenable
to large scale institutional trading.
[0023] Delivery application 107 may impose terms on how many shares
are submitted to trust 101, so as to ensure that the shares
submitted closely reflect the quantity of the underlying commodity;
this is desirable so as to minimize the shares not corresponding to
a full unit of the underlying commodity in the composition
specified in the delivery application. In such cases, a cash
component may be delivered reflecting the value of such commodity
not delivered in kind. For example, if the trust custodian stored
individual barrels of oil, the quantity that could be requested
might be restricted to the value of any whole number of barrels of
oil. Minimizing the cash component of a delivery request provides
significant benefits, not least of which is that a delivery
applicant is submitting shares because of a desire to receive the
physical commodity. Minimizing the cash component to each
transaction may also provide tax advantages.
[0024] Trust sponsor 109 arranges for the creation of trust 100.
However, trust sponsor 109, for purposes of facilitating an
exchange of shares of a delivery applicant 108 into physical
commodity to be delivered, is merely an agent that never takes
physical possession of the gold. This provides an additional
benefit in that the anti-money-laundering (AML) responsibility of
the investment vehicle remains at broker 102. Similarly, while
commodity dealer 105 and trust custodian 103 may physically hold
commodities, they are agents of the trust, not of the delivery
applicant. The trust's responsibility ends when the physical
commodity is handed over to delivery service 111. The system and
process are therefore highly scalable because it retains AML
responsibilities at broker 102, who has an established relationship
with delivery applicant 108. As such, many delivery applicants 108
may file delivery applications 107 with their respective broker
102. The trust sponsor may receive a fee for administrating the
system from the trust and may also collect a fee from delivery
applicant 108 every time a delivery is requested. The trust sponsor
109 may also be in contact with trust 101, trust custodian 103,
commodity dealer 105, and delivery applicant 108 via communications
network 112. Note that communications network 112 is shown as a
single element, but it can be multiple networks.
[0025] FIG. 2 illustrates a method 200 of accepting and processing
a delivery application. In step 201, a delivery applicant consults
with a sponsor to determine the availability of various physical
compositions of a commodity owned by the delivery applicant in an
investment vehicle associated with the sponsor. In step 202, the
delivery applicant completes a deliver application based on
information received in step 201 and wires the processing or
exchange fee to the sponsor along with the completed delivery
application. In step 203, the sponsor pre-approves the delivery
application and notifies the delivery applicant. In step 204, the
deliver applicant irrevocably submits shares in the investment
vehicle to an entity associated with the investment vehicle such as
a trustee in the example where the investment vehicle is a trust.
This submission of shares is conducted via the applicant's broker
and employs industry-standard share submission processes as
specified in delivery instructions.
[0026] FIG. 3 illustrates a method 300 of delivering a commodity to
a delivery applicant. Step 301 can continue from step 204 in method
200. In step 301, an entity associated with the investment vehicle,
such as a trustee in the example where the investment vehicle is a
trust, retires the shares that were submitted with the delivery
application in step 204. Depending on the content of the delivery
application, method 300 will continue with step 302 or step 303. If
the delivery application did not request a conversion of the
commodity, method 300 continues with step 302 in which an entity
such as the aforementioned trustee instructs a custodian to
facilitate delivery of the commodity to the delivery applicant. In
the situation of a gold backed investment vehicle, this step may
include the delivery of London Good Delivery Bars to the delivery
applicant from the custodian. If the delivery application did
request a conversion of the commodity, method 300 continues with
step 303 in which an entity such as the aforementioned trustee
instructs a sponsor to facilitate the delivery of the commodity to
the delivery applicant in a converted format. Step 303 will be
followed by both steps 304 and a transition via link step 305 to
method 400. Step 302 is followed by step 304. In step 304, cash
proceeds are wired to the delivery applicant from an entity such as
the trustee, or on behalf of the trustee by the custodian to
balance the value of the shares submitted against the closest
quantity of the commodity that could be delivered according to the
delivery applicant's specification.
[0027] FIG. 4 illustrates a method 400 conducted by a sponsor to
facilitate the delivery of a converted commodity to a delivery
applicant. In step 401, the sponsor instructs a commodity dealer to
swap a quantity of a commodity for an equal amount of the same
commodity in the format specified by delivery application 107. To
facilitate the transaction, custodian 103 transfers the commodity
held on behalf of such aforementioned trust to the commodity dealer
105; such transfer may take place by the custodian 103 first
converting the commodity into an unallocated commodity. In the
example of gold, the custodian might convert allocated gold held on
behalf of the trust into unallocated gold to be transferred to the
commodity dealer to procure a gold coin or bar as specified in the
delivery application. In step 402, the sponsor instructs the dealer
to deliver the commodity specified in the delivery application to
the delivery applicant. Referring back to method 300, it may be at
this point that step 304 is executed.
[0028] FIG. 5 illustrates a method 500 conducted by a sponsor to
facilitate the delivery of a converted commodity from a trust to a
delivery applicant. In step 501, the sponsor arranges for the
creation and registration of the trust. The trust comprises shares
that reflect a performance price of the commodity less operating
expenses of the trust. Shares of the trust are traded by brokers.
In step 502, a delivery application provided by a delivery
applicant is reviewed which contains a commodity delivery
specification. In step 503, the sponsor pre-approves the delivery
application. Step 503 may be conducted after confirming with a
commodity dealer that a specified composition of the commodity
meeting the delivery specification is available and reserved by the
commodity dealer. In step 504, the sponsor contracts with the
commodity dealer to fulfill the commodity delivery application. In
step 505, the sponsor arranges for the delivery of the commodity as
described in the delivery application. Method 500 requires a
custodian to transact with the commodity dealer to convert the
commodity stored by the trust in a custodian account into a
different physical composition as specified in the delivery
application. In certain embodiments, this is an integral part of
steps 504 and 505.
[0029] The method described with reference to FIG. 5 could include
additional steps. The sponsor can collect a fee from the delivery
applicant. The fee could be collected from the delivery applicant
as part of the delivery process. This step could be executed when
the delivery application is received. The exchange fee could be set
on a periodic basis prior to when the delivery application contacts
the sponsor about a transaction. Therefore, the cost of the
transaction can be determined ahead of time which can offer
advantages, as all fees can be paid before shares are submitted.
The sponsor could also appoint inspectors to monitor the accounts
of the custodian. The sponsor could also instruct the precious
commodity dealer to swap unallocated units of the commodity into a
composition of the commodity as described in the delivery
application. The sponsor could also notify the delivery applicant
directly or via the broker when the delivery application is
preapproved. The sponsor could impose terms on the number of shares
to be specified in a delivery application which can offer
advantages, such as minimizing the cash component of the
transaction. Finally, the sponsor could impose terms on the
delivery specification to minimize a cash component generated when
delivery applicant 108 surrenders shares to the trust 101 to
facilitate the exchange of shares for the physical commodity.
[0030] Although embodiments of the invention have been discussed
primarily with respect to specific embodiments thereof, other
variations are possible. Various configurations of the described
system may be used in place of, or in addition to, the
configurations presented herein. Those skilled in the art will
appreciate that the foregoing description is by way of example
only, and is not intended to limit the invention. Furthermore,
nothing in the disclosure should indicate that the invention is
limited to systems and methods that involve gold or precious metals
as the invention is broadly applicable to other physical
commodities such as oil, silver, copper, frozen orange juice,
natural gas, and coal. In general, any diagrams presented are only
intended to indicate one possible configuration, and many
variations are possible. Those skilled in the art will also
appreciate that methods and systems consistent with the present
invention are suitable for use in a wide range of applications
encompassing any related to investing in commodities and physical
goods.
[0031] While the specification has been described in detail with
respect to specific embodiments of the invention, it will be
appreciated that those skilled in the art, upon attaining an
understanding of the foregoing, may readily conceive of alterations
to, variations of, and equivalents to these embodiments. These and
other modifications and variations to the present invention may be
practiced by those skilled in the art, without departing from the
spirit and scope of the present invention, which is more
particularly set forth in the appended claims.
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