September 30, 2023

Physical gold v. gold funds.

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  With the announcement in [Jan 8 2013] iNews Cayman that the Cayman Island Monetary Authority (CIMA) have approved the registration a new Cayman Regulated Physical Gold fund, I think you will find the following article of interest

Investing in Physical Gold: Is It Worth the Cost?

By Ryan Ong in Investments

Never discuss physical gold vs. gold funds without a first aid kit. Or an ambulance on standby. I asked about it once…I mean once as in a passing whisper of a question…and I am lucky to be alive. US Marines see less conflict on a bad day in Baghdad. This topic is contentious: Some gold investors treat it as a religion, and claim not having physical gold is heresy. Their detractors suggest that paranoia is a sad, costly disease. Who’s right? You decide:

Physical Gold vs. Gold Funds

There are many different ways to invest in gold. The oldest and most direct method is, of course, to buy the gold and keep it somewhere.

Over time, this has started to fall out of favour. Not least because stuffing your mattress with gold full on sucks. Some investors think there’s no need for physical gold; they just needed gold exchange traded funds (ETFs) or gold related equities.

If you’re considering investing in physical gold as opposed to gold funds, when you buy gold bars it can be a tangible and secure way to add this precious metal to your portfolio.

Depending on how you choose to invest in gold, you get different advantages. Let’s start with the pros of buying physical gold:

1. Tangible Assets Are Safest

As a tangible asset, physical gold is considered to be safer than “paper” gold. An avid proponent of this is investor James Leong, who has up to 10% of his investments in physical gold:

Gold mining equities are very risky compared to physical gold,” James says, “Because you are dealing with a company, not a commodity. Sometimes, the country where the mine operates might experience new regulations, such as a raise in corporate taxes, or even government seizures. This will cause the stock value to fall.”

Come on. How often does that happen?

Just last year (2011) a Canadian gold mining company, Crystallex, launched a $3 billion case against Venezuela for nationalizing its mining assets. The stock plunged almost overnight.”

Oh. Well what about gold ETFs?

The risk with gold ETFs is a fraud risk. There is no guarantee that the fund has the gold it claims to have. There have been rumours of plated tungsten being passed off as gold. And if gold is ever seized by a government, the ETFs will not be spared.”

2. Gold Depletion

How much gold is there on Earth? The only answer is “Never enough”.

No gold mine is inexhaustible. Once a gold mine is spent, the mining company’s stock will fall,” James says, “Even if there is a chance of getting more gold, the company has to dig deeper, survey new sites, and buy new equipment. All of this affects the stock price.”

On the upside, James says gold ETFs are free from this risk. This is because: “With an ETF, the fund owns gold bouillon and issues shares against it. So the only fears are fraud and seizure. But even with this additional security, you can see that owning physical gold is the safest.”

3. No Exchange Risk

ETFs and gold mining equities are subject to exchange risks. That is, the chances of disruption in the event of stock market closures.

The stock market can be closed due to hacking, government intervention, or bomb threats,” says James, “and this can disrupt the liquidity of gold based equities.”

James also points out that ETFs are subject to the honesty of auditors and agents. This risk is “true of all equities, including gold-based equities.”

4. Anonymity

If you need anonymity, physical gold is the way to go. James mentions that physical gold leaves a smaller “footprint”.

Just imagine if your portfolio has a “clear history” option, and you have it permanently selected. That’s what trading in physical gold can do: You can deal directly with goldsmiths, pawnbrokers, or…interested individuals. Transaction history will be minimal, compared to stocks.

Caveat: The closest I’ve been to any sort of laundering is a free Dynamo sample. I am not encouraging any sort of criminal activity.

Now let’s talk about the cons of buying physical gold:

1. Transaction Costs

Gold comes with high transaction costs. That’s what happens when you need to hire an armoured truck, power loaders, and a no-neck guard named “Olga” who bench presses planets. That’s what it takes to move a precious metals from point A to point B.

The cost of transporting gold is compounded by countless agents, management fees, and auditors. A gold investor I spoke to, who only wanted to be known as Paul, says:

If you want to buy gold, buy gold ETFs. The transaction fees for owning actual gold are insanely high. They vary, but if you’re not a big investor dealing with millions, they aren’t going to waive any fees for you”. 

2. High Insurance Cost

Paul says that:

Gold can be stolen, melted down, physically concealed. It is an asset that can be taken and fenced (fenced = sold illegally – Ed.) So keeping physical gold means you need to buy insurance for it. And insurers will charge high premiums.

Also, if you are so worried about government seizure, how can you insure your gold? Once you insure it, the government knows you have it. So you pay high insurance, and nullify your so-called safety against seizure.”

In addition, Paul rolls his eyes at the suggestion of governments seizing gold. Especially in developed countries.

But if you do buy gold and are interested in the right insurance, follow us on Facebook. We’ll be asking some insurers about that soon.

3. Difficult to Sell

Most goldsmiths and pawnbrokers will appraise your gold for nothing. That’s also the profit you might make selling to them.

“Goldsmiths are honest about the market price,” Paul says, “but they will not make their purchase at that exact price. You can expect them to buy gold from you at a much lower rate. It depends on who you go to. But it will never be cheaper than just buying and selling via a gold ETF”.

Paul also points out that “paper” gold can be bought and sold in minutes. Physical gold needs to be carried around, appraised, and bargained over. When speed counts, paper gold wins.

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