A question from reader Kent:
On the topic of gold, if one believes it is the future, what is best way to own it? Is GLD a safe way to invest? Do you have to own the physical gold? There are a lot of concerns about the integrity of the market.
There are several ways to participate in gold, if you believe the price is going higher.
Physical Gold
The safest way is to own and store the metal itself. Bullion bars and gold coins are two options. Of these two options, I prefer gold coins like the American Eagle or Krugerrands. They are easily recognizable and do not need to be assayed. Unless you are talking huge quantity, coins should be fine.
Do not buy collectibles if you are looking for pure gold protection. You will be paying for gold plus “collectability.”
Storage is an issue, but not as big an issue as many make it to be. Reasonable quantities of gold are easy to store (hide). 20 American Eagles represents a stack of coins similar to a stack of 20 quarters. This stack represents about $27,000. It doesn’t take much space to hide $100,000. Depending upon your tastes, use your safety deposit box, a nook in your home or garage or bury it outdoors.
Gold ETFs
Gold ETFs are the easiest way to own gold. GLD is the biggest. You can buy and sell shares in this like a stock. GLD represents a tenth of an ounce of gold. It sells for about that price less a discount.
There is what has been termed “Madoff” risk associated with precious metal ETFs. What if they really don’t hold the physical gold they represent? They are more convenient than physical but less safe. Other ETFs in this area that may be worth considering are SLV and CEF. SLV is a silver ETF. CEF is a Canadian ETF that holds both gold and silver.
I always use stops for these ETFs, not so much as a trading device but as a protection against the Madoff risk. For example, if I don’t expect gold to go down 10%, I might put a stop there with the hope that if adverse “Madoff” news hits, I will be taken out somewhere close to my stop. These are not stops I expect to get hit in normal market action.
Gold Stocks
Another way of playing gold is to own mining companies like Newmont. An easy way to achieve diversification is via ETFs. Two of these are GDX and GDXJ. GDXJ is a collection of junior mining stocks and is typically more volatile than GDX. If you believe that gold is going to rise dramatically, gold stocks should provide a better percentage return.
There are other considerations that you may want to consider, including having your gold off-shore for fear of confiscation, whether a safety deposit box is really safer than a hidden place, etc. etc. For additional information, do some work on the internet.
[...] Response to Gold Question (economicnoise.com) [...]
Here is a response from an investment advisor who wishes to remain anonymous:
“We have swapped all GLD into gold miners. Primary reason was our concern that GLD does not allow the average holder to present the GLD certificate in exchange for physical gold.
My concern is that if we reach a point where the possession of physical gold becomes a penultimate condition, I worried that average holders of GLD would try to sell the shares and buy physical or gold miners and a proxy. This increasing swap pressure might push down GLD’s price while raising physical/mining company prices.”
Sprott Physical Gold Trust apparently permits shareholders to swap shares for gold. But my friend who recommended it to me says that the shareholder has to have a very large position to do it.
Sprott Physical Gold (PHYS) trust claims to have physical gold in the Canadian Royal Mint. GLD has a reputation for having a lot of paper gold. I am not sure how paper gold is any better than fiat money. It may actually be considerably worse, and I have stopped owning Canadian bank stocks (the Canadian banks were praised for their sound policies after the subprime mortgage meltdown) because they sell unallocated gold certificates, which are literally the bank selling a short position on gold whereby the buyer assumes the bank’s default risk. No thank-you. And no thank you to owning the bank which assumes short positions in gold.
There is no question that physical gold is the best way to go. My core position is physical. My trading is done in GLD, SLV, etc. It has a Madoff risk, but it is the only practical way that I know of to take extended positions which I can remove quickly.
Actual gold is difficult to liquidate, ’tis true.
Why not trade PHYS? They are not supposed to be dealing in paper gold at all, not according to the Sprott website.
I have no information on PHYS other than what I obtain from the internet. I think all of these ETFs must be watched.