why is Chris cool on GLD?

drbrucedale
By drbrucedale on Sat, Jun 21, 2014 - 11:09pm



I am new to precious metals but I understand the rationale for owning them.  I can buy GLD and SLV through my retirement plan with pre tax dollars, so that investment approach is very attractive to me.  However, Chris seems quite negative on GLD.  I would appreciate understanding why he (or any of you) feels that way.  Understand the pros and cons of owning GLD or SLV versus the physical metals will help me make a better decision. Thanks for your help to anyone who might care to respond.

11 Comments

skyfall's picture
skyfall
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There's a good quote in the

There's a good quote in the book "The Death of Money" where the author says that "the amount of gold subject to paper contracts is one hundred times the amount of physical gold backing those contracts."

Holding the physical asset trumps all.  A paper claim on an asset could turn to nothing in the event of a serious collapse. 

davefairtex's picture
davefairtex
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GLD custodian

The entity that actually holds the bars behind GLD is HSBC.  In the event there is a problem in the gold market, I for one don't trust HSBC not to have some China-metals-like rehypothecation issue with their gold bars that ends up trumping GLD's claims.  I expect the big banks to hose their customers at the drop of a hat, and since gold is a Big Disaster insurance policy, putting my faith in a big bank to come through for me during a Big Disaster just seems like folly.

 

drbrucedale's picture
drbrucedale
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thanks and follow up question

Thank you davefairtex and skyfall.  I get that concern. Any GLD or SLV holdings I might accumulate I can convert to cash in 24 hours.  If and when GLD got sufficiently high, I probably would cash out anyway or if Chris or you folks who keep an eye on such issues as re-hypothecation might sound the warning, I would cash out immediately. Do you expect that conditions that might lead to a hosing of customers would be sufficiently clear a week or two in advance so as provide such a warning to those of us who don't quite live and breathe this stuff?  

davefairtex's picture
davefairtex
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GLD as a trading vehicle

I think if you're a trader and you watch prices daily, GLD is a fine vehicle for speculating on gold price movement - so are COMEX futures, for that matter.  Trade them with wild abandon.

But as a disaster insurance policy, I don't think either will do very well when it counts.

For instance, perhaps the first sign of trouble we might see is when GLD suddenly stops tracking COMEX gold prices.  We won't know what the problem is (although we'll have some guesses) but at that point, you'll already be down, and the truth will only come out weeks later.

Another issue is "clawbacks" - the people in charge of resolving the Madoff ponzi scheme clawed back profits made by people who sold out prior to the exposure of the scam.  If you do manage to get out right before things blow up, your profits could be clawed back.  Not much fun for you.

Do you know about PHYS, or PSLV, or CEF?   I'd say any one of those is better than GLD/SLV, if your goal is to have an insurance policy in "paper gold" (i.e. in an ETF that represents fractional ownership of gold/silver bullion) that you don't have to keep an eye on just in case things go south.

 

drbrucedale's picture
drbrucedale
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Thanks to davefairtex-second i

Thank you for these insights.  I am pretty well-protected with other kinds of disaster insurance as suggested by Chris and many others.

I am using GLD as an investment (I hope it is not speculation) to take advantage of likely upward movement in gold prices.  II accept the arguments made by Chris and others that the fundamentals for owning gold are very strong....it is really underpriced. 

My GLD investment is through Fidelity.  I suppose a claw back is theoretically possible, but I don't see Fidelity going along with that at all or any mechanism to force them to do so, short of a new law.  Why would they allow their business model to be destroyed?  If an investor's gains can be taken back, then that would be the end of Fidelity and the other investment houses.

I will check into PHYS, PSLV and CEF to see if Fidelity offers them.   In the meantime, could you take a few minutes and tell me why they are different from and superior to GLD? Thanks very much.

davefairtex's picture
davefairtex
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bullion ETFs

Dr-

If you read the prospectus for GLD, it states that their gold is/can-be held by third party depositories, and that those depositories may in fact not have gold and that they have no control over them at all, and that as a result there may be losses to GLD shareholders.  Its kind of a funky model, but you have to dig to figure this out.  Others online have suggested that GLD actually contains the unallocated gold of the bullion banks.  Unallocated gold schemes work well right up until people start asking for delivery during times of crisis.

How many times has this same gold been spoken for?  We don't really know.  It could in fact be gold stored in a central bank vault and leased to the bullion bank and then the interest is sold to GLD - perhaps under terms that subject that gold to various forms of clawbacks under some circumstances.

The gold in PHYS and the silver in PSLV is owned by the ETF itself, and is physically stored in one particular vault.   There are no third party depositories, no baskets - its a much more straightforward arrangement.  And if you happen to own a large enough number of shares of PHYS or PSLV, you can actually demand physical delivery of one of their massive bars - for a fee, of course.  You can't do that with GLD or SLV.

All these instruments are ETFs - if you can buy GLD, you can buy PHYS - however they operate quite differently underneath the covers.

The one side-effect of all this is that PHYS/PSLV can sometimes trade at serious premium and/or discount to NAV because of the nature of the ETF itself.  In GLD, any bullion bank can generate a "basket" when demand for GLD shares increases, keeping the premium in line.  However if demand for the PHYS ETF rises, it can take quite a while before Sprott (the manager of PHYS/PSLV) can run out and buy more physical bars for the fund, and sell the associated shares into the marketplace.

This side effect can make PHYS substantially more attractive during a crisis - the certainty you can get actual gold out of PHYS tends to result in an increase in premiums for PHYS when stresses rise.  I.e. you make more money than you would if you just bought GLD.

drbrucedale's picture
drbrucedale
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many thanks to davefairtex

Davefairtex:

Thanks so much for this clear explanation.  I do see the advantages of this means of buying gold.  I will start factoring PHYS and PSLV into my investment options and start moving away from GLD when the premium/discounts are working in my favor. That will probably be pretty soon, although I need to do the research first. 

I don't know how to repay your kindness, but perhaps I can find a way in the future. 

davefairtex's picture
davefairtex
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i feel like colombo

Dr brucedale-

"Just one more thing."

PHYS is right now trading at a slight discount; PSLV is at a premium.  I'm glad you found my thoughts useful.

So there is a new instrument just introduced by Axel Merk - OUNZ - which yet another option for you.  If you are buying in quantity (i.e. 4000 shares or more - i.e. 40 ounces-equivalent) then you can use it in order to cost-effectively receive delivery of physical gold bars, or coins, or whatever, if you decide you want to do this at some point in the future.  Supposedly, its not a taxable event to take delivery of bars & coins.

I'd say OUNZ (and Merk himself) is as reputable as PHYS - JPM is the custodian and I don't trust them so much, but the OUNZ gold is allocated, and it seems that Mr Merk has gone to great lengths to make sure its really segregated as best he can.  And the ability to take delivery on smaller amounts of gold is really quite useful - if that's the sort of thing you think you might want to do at some later date.

Merk is right now doing the rounds flogging his new ETF.  My opinion: that's why he appeared here at PP.  "Buy my new ETF, I think its cool."

I actually do think OUNZ is cool, FWIW.  You just have to figure out if it meets your particular needs.

 

Jim H's picture
Jim H
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OUNZ vs. PHYS

I agree with Dave's assessment... OUNZ is cool, except for the fact that you have JPM as a counter party.  I am testing the water a bit with a little bit of OUNZ in the IRA in order to keep an eye on the way the market is treating it premium-wise, but am still 10:1 weighted in PHYS vs OUNZ.  PSLV has already sported a premium as high as 25%, so the Sprott funds have something of a proven history in terms of their performance in the face of physical shortage, real or perceived.  When Gold fever hits the Western masses, we will be facing the mother of all real, physical shortages... in the face of a much diminished GLD.  Should be really, really interesting to say the least.  For now, most Western investors still perceive dollars as scarce, and Gold as... well.. not so much.  

     

drbrucedale's picture
drbrucedale
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Posts: 9
Thank you both

My thanks to both of you for these additional insights and options.

 

KennethPollinger's picture
KennethPollinger
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And THANKS to MISH for this
 
 
 
 

http://globaleconomicanalysis.blogspot.com/)" rel="noreferrer noopener">Mish's Global Economic Trend Analysis

 

How Much Gold Should Someone Own? Where and How To Own It?

Posted: 29 Jun 2014 10:48 PM PDT

Periodically I receive questions on gold ownership. How much should one own, and where?

Let's start with the first question:

How Much Gold Should Someone Own?

There is no fixed answer, but rather a general methodology that I like:

  • Do not invest outside your comfort zone.
  • Think in terms of percentages, not fixed amounts.
  • For some, 10% is too much, for others 30% is too little.
  • Some do not trust anything else and are willing to hold a huge percentage of their assets in gold 
  • If a 30% decline in value would give you sleepless nights, then whatever percentage you have is too much.
  • If you dislike investments that do not yield a dividend, then gold probably should not be a significant portion of your portfolio.
  • Even if you dislike investments that do not pay a dividend, it may be wise to consider putting 5% of your assets in gold to protect against a crisis.

For those who understand the reasons to own gold and will not panic over fluctuations, in my assessment, 20% is a reasonable starting point.

Finally, for those with a lot of credit card debt or other high interest debt, I suggest paying off all that debt before making any investments. 

As to the second question:

How To Own It?

There are numerous choices. 

  1. Gold Miners
  2. Physical Gold
  3. Gold ETFs
  4. Gold Funds

Gold miners are a leveraged play, and in the case of junior miners, a speculative play on gold. The bulk of one's gold assets should not be in this class. 

Physical gold, ETFs, and Funds can overlap in various ways. 

  • Gold mutual funds are generally plays on miners but some may also contain physical gold.
  • ETFs may be plays on miners or plays on physical gold.
  • ETFs may or may not contain audited gold.
  • ETFs may or may not allow delivery of physical gold.
  • Physical gold can be in your possession in the form of gold, bullion, or coins.
  • Physical gold may be in external storage in the form of gold, bullion, or coins.
  • External storage may be in in your country or in a foreign location.

Some want gold in their possession. I hold none of mine that way. I prefer audited gold, in vaults, spread around for safety. I also prefer bars or bullion over coins that have a higher markup.

For others, seeing is believing. 

For those who don't trust governments as well as those who live in unstable countries, holding gold outside the country they live in is a good idea.  

Remember, if you do choose physical possession, you will need theft insurance or some other means of ensuring its safety. And if you have lots of physical gold, it's best not to tell anyone (for obvious reasons). 

OUNZ Recommendation

Among the ETF choices, I highly recommend that investors consider the Merk GOLD TRUST, the deliverable GOLD ETF (OUNZ)

The Merk Gold Trust (the “Trust” or "OUNZ") provides investors with a convenient and cost-efficient way to buy and hold gold through an exchange traded product with the option to take physical delivery of gold.

The Trust’s primary objective is to provide investors with an opportunity to invest in gold through the shares and be able to take delivery of physical gold bullion (physical gold) in exchange for their shares. The Trust’s secondary objective is for the shares to reflect the performance of the price of gold less the expenses of the Trust’s operations.

OUNZ may be a great choice for those ...

  • Who do not like dealing with wire transfers to buy or sell gold.
  • Who buy small quantities.
  • Who want to take physical delivery in the form of coins.
  • Who want an easy to understand ETF that contains audited gold.

Interested parties should download the Merk Gold Trust (OUNZ) Prospectus.

OUNZ is simply what it says it is: an investment in gold. You can buy/hold/sell on the NYSE, or you can take delivery of your gold. Its expense ratio is low (0.40%) and a share of OUNZ is approximately equal to 1/100 of a Fine Ounce of gold.

Taking possession in OUNZ does not trigger a tax event as you are simply taking possession of what you already own. 

Unlike OUNZ, the Sprott Physical Gold Trust (PHYS) is a Canadian closed-end mutual fund that may trade above or below NAV.

Moreover, investors in PHYS may have to pay taxes when taking delivery; The prospectus states: “If any holder redeems his, her or its units for physical gold bullion …, the Trust will be treated as if it sold physical gold bullion for its fair market value in order to redeem the holder’s units.

GoldMoney

Most readers know I have a relationship with GoldMoney and I still recommend that option as well. It is a great way to own gold.

GoldMoney contains audited, physical gold, in vaults in various countries. You can select the vault if you wish.    

However, GoldMoney does require dealing with wire transfers, which adds expenses when dealing with small amounts. Some may dislike the paperwork when opening an account.

Other Options

There are numerous ways to invest in gold. I mentioned two that I specifically like and the reasons I like them. Other choices may or may not be for you, based on your individual needs and preferences. 

There is no absolute right or wrong, just a set of choices, some better than others.

Disclosure

I have a relationship with Merk as well as Goldmoney. I choose my relationships carefully. However, you still need to conduct your own due diligence.

Disclaimer

The material must be preceded or accompanied by a prospectus. Before investing you should carefully consider the Merk Gold Trust's ("Trust") investment objectives, risks, charges and expenses.
Investing involves risk, including possible loss of principal. The Trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for the purposes of the Commodity Exchange Act. Shares of the Trust are not subject to the same regulatory requirements as mutual funds. Because shares of the Trust are intended to reflect the price of the gold held in the Trust, the market price of the shares is subject to fluctuations similar to those affecting gold prices. Additionally, shares of the Trust are bought and sold at market price, not at net asset value (“NAV”). Brokerage commissions will reduce returns.

The request for redemption of shares for gold is subject to a number of risks including but not limited to the potential for the price of gold to decline during the time between the submission of the request and delivery. Delivery may take a considerable amount of time depending on your location.

Commodities and commodity-index linked securities may be affected by changes in overall market movements and other factors such as weather, disease, embargoes or political and regulatory developments, as well as trading activity of speculators and arbitrageurs in the underlying commodities.

Trust shares trade like stocks, are subject to investment risk and will fluctuate in market value. The value of Trust shares relates directly to the value of the gold held by the Trust (less its expenses) and fluctuations in the price of gold could materially and adversely affect an investment in the shares. The price received upon the sale of the shares, which trade at market price, may be more or less than the value of the gold represented by them. The Trust does not generate any income and as the Trust regularly issues shares to pay for the Sponsor’s ongoing expenses, the amount of gold represented by each Share will decline over time. Investing involves risk and you could lose money on an investment in the Trust. For a more complete discussion of the risk factors relative to the Trust, carefully read the prospectus.

The sponsor of the Trust is Merk Investments LLC (the “Sponsor”). Foreside Fund Services, LLC, provides marketing services to the Trust.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visithttp://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

 

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