Gold derivatives trader GoldLink Capital has completely unwound positions in one of its listed investment vehicles, and is in the process of realising those held in another, after plunging volatility in the gold market undermined its investments.

Two GoldLink listed investment companies (LICs), GoldLink IncomePlus (ASX: GLC) and GoldLink GrowthPlus (ASX: GLI), incurred heavy losses as volatility in the gold market fell from a 27 per cent in 2006 to a sustained low of 12-15 per cent from December 2006 through to May. In a statement to the ASX, GLI confirmed it had realised its investment portfolio and held no exposure to the gold market or contractual liabilities with banking counterparties. After losing $30.93 million in the year ending June 30, the company held $4.52 million in its bank accounts. The Goldlink board has also instructed the asset management arm of the company to unwind the GLC portfolio, the older of the two LICs, and realise assets. The value of the unrealised portfolio was negative $125 million at June 30. Directors expected that the costs of the process would near $131 million and be completed within the quarter. Any sale, novation or recapitalisation of the portfolio were not considered to be viable alternatives. However it is understood that Goldlink does not aim to completely liquidate the LICs. Reasoning that the companies hold value because they are listed, the board is considering retaining cash and franking credits in the company until a final decision has been reached. Standard & Poor’s (S&P) withdrew its three star ratings of the LICs last week, after placing them ‘on hold’ in May following the departure of Mike Ward, GoldLink director dealing and risk management, from the manager, and the implementation of a risk mitigation plan following the losses. In late May, Ward joined Commonwealth Bank of Australia as senior manager commodities sales, trading in base and precious metals. Greg Barr, S&P director fund ratings, said GoldLink’s strategy had been effective for a number of years until volatility in the gold market, tracked by the Australian dollar gold price volatility curve, dropped away. “Mike was the one who was working out leverage and the active strategies, to put them on and take them off,” Barr said. GoldLink conducted long-dated gold-forward sales. Its strategies involved borrowing gold, through gold derivatives, from banking partners in the over-the-counter market, which grew out of the interbank market, and lending it to other investors. It paid the gold lease rate as interest to its banking partner and loaned the gold at the forward rate for the term of the lease, which is higher than the gold lease rate, to borrowers. The forward contracts that GoldLink issued drew values higher than gold spot prices. The performance of the portfolio improved during periods of volatility in the gold market.

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