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Posts Tagged ‘physical gold’
Gold ETF’s
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A gold ETF is an exchange-traded fund that tracks the price of gold. Gold ETF’s can be found on major stock indexes. One example is SPDR gold trust with the ticker symbol GLD; it is traded on the NYSE. The intention of these funds is to allow investors to invest in the price action of gold. Many of these ETF’s are not backed by gold, or are backed by only a very small amount of gold. The intention here is to speculate on the value of the spot price only. ETF’s will not give you the same protections that owning physical gold will.
How safe is it to own gold ETF’s in today’s economic climate? There are a few items to consider. Bear in mind ETF shares are not actually backed 100% by physical gold, but a combination of gold and a mechanism of derivatives. The actual amount of physical gold an ETF holds is rarely disclosed and covertly disguised in a labyrinth of accounting figures. Try asking a stockbroker what percentage of the ETF is physical gold, and furthermore if you wanted your gold, would you ever get it?
There is also counterparty risk involved in owning gold ETF’s. For example, in September 2008, shareholders in ETF Securities backed by AIG were unable to trade popular commodity securities, due to concerns over the future of their backer AIG. Banks and brokerages actually stopped making markets in the Exchange Traded Commodities (ETCs) backed by AIG, and sold by ETF Securities (ETFS). Consequently the price of the stocks also plummeted over 50% due to the concerns for AIG’s future.
Also remember the physical bullion used to back whatever portion of an ETF is confiscatable by the government. The U. S Government did in fact confiscate gold in 1933 due to extraordinary economic conditions. Should the current economic crisis reach that point again and the government again confiscates gold, the wealth insurance you need most will be taken away.Gold ETF’s can be more expensive to hold than physical gold. With physical gold there is a one-time fee. As opposed to ETF’s where there are many fees starting with one-time fees to buy and sell and annual fees like management expenses, insurance expenses, regulatory fees, exchange fees, accounting expenses, marketing expenses, legal expenses and storage expenses.
Gold ETF’s will give you exposure to the price action of gold, which is great for speculation purposes. What it can’t give you is the safety and security of owning the physical metal itself. Keep in mind physical gold will still give you access to price action.
Those people who decide to buy and own physical gold, their stored value remains more stable than those who own ETF’s. As the value of the dollar decreases, it takes more dollars to buy an ounce of real gold. The “share price” of actual solid gold does not deteriorate as a result of any financial meltdown. Indeed the value of these gold holdings is very likely to go up, and the gold price will continue to increase with the addition of more people seeing it as a safe haven in these stressful times.
Here are some examples of Gold ETF’s traded today:
Ultra Gold ProShares UGL
E-TRACS UBS Bloomberg CMCI Gold ETN UBG
PowerShares Global Gold & Prec Metals PSAU
iShares COMEX Gold Trust IAU
ELEMENTS MLCX Gold TR ETN GOE
UltraShort Gold ProShares GLL
SPDR Gold Shares GLD
Market Vectors Gold Miners ETF GDX
Market Vectors Junior Gold Miners ETF (GDXJ)
Who Buys Gold?
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Many people participate in acquiring physical gold worldwide. Some want capital appreciation and others are looking for preservation of principle. It should be noted that gold is foremost a form of financial insurance for the paper assets in your portfolio. This is because gold and paper assets generally have an inverse relationship. Meaning when stocks go down gold goes up. However there have been periods when stocks and gold have risen together.
The types of buyers of gold are diverse. From foreign central banks and governments, to large institutional buyers and individuals looking to protect the money they have. Most buyers of gold today are concerned with the current economic situation worldwide. The main concern in the United States is the erosion of the U.S. dollar. On a side note, as the dollar becomes weaker the value of gold rises so everyday that the dollar weakens a portion of the rise in gold is attributed to gold being priced in dollars. Another portion of the rise in price is supply and demand.
Anyone who is concerned with the weakness in the U.S. dollar is your main buyers of physical gold today. India recently purchased 200 metric tones of gold from the IMF, and sited their concern with the U.S. dollar. There are those that are buying gold for growth in their portfolio as well. Those institutions and individuals that want to capitalize on the appreciation potential that we see ahead.
There are other reasons why people acquire gold:
1. High inflation, or the fear of high inflation
2. Turmoil in stock markets
3. Spiking interest rates
4. Oil and other commodity price shocks
5. Banking crises
6. International loan defaults and other debt crises
7. Geopolitical crisis
Gold generally performs well in all of these circumstances. Those that own gold in their portfolios have to decide how much to own. This is the trickiest part because you have to determine what your goals, objectives and concerns are. If the dollar was to be devalued by 50% one would need to own 33% of their portfolio in gold to offset the losses in their paper assets (this is obviously grossly overstated, but meant to give general understanding). Many governments and individuals own gold, and as the trend with the dollar continues more people will buy into the gold market, driving values higher.
Are Gold Stocks Better than the Physical Metal Itself
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Are Gold Stocks Better than the Physical Metal Itself? I personally do not believe so, but there is a tool for every job inside of any portfolio. But let’s look at some interesting points:
1. There is no one between you and physical gold (unless you have a company store it for you)
2. It cannot disappear due to creative accounting
3. Company’s cannot mismanage it
4. Gold cannot go bankrupt like a company
He who controls the asset has the power. Consider that if you have an asset in your possession, that no one has more control than you. For that very reason alone, physical gold is better than paper. But let’s look at gold stock performance in the past compared to the Dow and physical gold.
Gold stocks do not follow the physical metal exactly. “The performance of gold stocks at the end of 1987 should serve as a reminder to investors that these issues are still stocks and vulnerable like other equities during bouts of market weakness,” said gold fund portfolio manager at United Services in San Antonio, in the Investor’s Business Daily.In October of 1987 following Black Monday the Dow lost 41%, falling from 2,746 to 1,616. During that same period gold stocks (XAU), lost 46%, falling from 157 to 84. During that same period physical gold rose over 18%.
Following these initial losses in the Dow and gold stocks, gold stocks stayed down longer than the Dow. In fact the XAU finished 1988, over one year later, virtually unchanged while the Dow recouped close to half of what it lost. Over a 26 year period the Dow fell by 10% or more over 25 times, while gold stocks fell by a larger percentage and more often.
Performance isn’t the only consideration. Gold mining companies can go bankrupt for a variety of reasons, rendering their stock worthless.
If the paper dollar fails you have something in your possession that can be bartered with or exchanged for any other currency on the planet.
Finally, physical gold is portable, therefore can go with you anywhere you want. For these reasons I like the physical metal in my portfolio over any other form of gold.
Is Gold a Good Investment?
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Gold is a great investment! Gold is a tool that needs to be used in your portfolio for its intended purpose, which would be different for every person. You need the right tool for the right job. Sure gold can be used in anyone’s portfolio as an inflation hedge, but gold can do much more for you than that.
Gold is firstly financial insurance; to hedge your portfolio during times of financial setbacks suffered by paper assets i.e. a falling dollar or a collapsing stock market. However gold can also be added to any portfolio for the following reasons:
1. High inflation, or the fear of high inflation
2. A decline in the U.S. dollar or other key world currencies
3. Turmoil in stock markets
4. Spiking interest rates
5. Oil and other commodity price shocks
6. Banking crises
7. International loan defaults and other debt crises
8. Geopolitical crisis
Gold in your portfolio can offset losses during down times or can even grow during prosperous times. Gold has gone from $252 per ounce in July of 1999 to $1,050 per ounce where it currently is today. That is over a 300% gain in 10 years! Some of this thriving came during the dot com bust, but some of it came while the Dow was climbing from 7,286 in October of 2002 to 14,164 in October of 2007 where it topped out.
There are a couple different ways that you can own physical gold; there is gold bullion and U.S. rare coins also called numismatics. These two types will provide different tools for you portfolio. You can acquire for strictly asset protection, or you can acquire for growth. You should consult a professional gold consultant to help you determine what will work best for your goals and budgetary parameters. Like I said earlier each person is different so working with a professional is highly recommended. As for the question is gold a good investment, I think the performance over the last 10 years speaks for itself. Many experts agree that gold will continue to rise in the future.
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