PMGOLD ?

[stuper1]

To set up my PP, I'm planning to hold a little physical gold, and split up the rest between two gold funds, probably IAU and one other.  I've been looking into PMGOLD traded on the Australian Stock Exchange.  They list an expense ratio of 0.15%, but it actually starts at 0.075% for less than 13.34 oz of gold and increases up to a maximum of 0.15% as you buy more.  For my purchase level of around $50,000, the expense ratio would be about 0.12%, which is half of the IAU fee.  I know I'll pay a foreign transaction fee at a brokerage, but that's a one-time fee of less than 0.1%, and I'll use IAU for rebalancing.  PMGOLD will offer some geographic diversification, and the Perth Mint has been around for 115 years or so, which is a good track record.

Hopefully my 401k brokerage window will allow ETF transactions on a foreign stock exchange.  I'm still waiting to find out.  If not, I'll have to do it in a Roth IRA account, which I know is less than ideal from a tax perspective, but I'm willing to sacrifice that if needed.  The only catch I can think of is that I think I saw something on one of the brokerage websites saying that they don't allow foreign transactions in an IRA account.  I'm not sure if that was just their rule, or if the government doesn't allow foreign transactions in an IRA account.  Does anyone know the answer to this?

Also, if anyone sees any flaws in my plan, please let me know.  Thanks!

[bronsuchecki]

They list an expense ratio of 0.15%, but it actually starts at 0.075% for less than 13.34 oz of gold and increases up to a maximum of 0.15% as you buy more.

That happens because we collect the 0.15% management fee by deducting units from investors, rather than selling gold backing the units. Because we deduct, we do it at a rate of 1 unit for every 667 units held (=0.15%) so we divide a holding by 667 and then have to round down to a whole unit to deduct. Hence the lower effective rate for smaller holdings.

PMGOLD will offer some geographic diversification, and the Perth Mint has been around for 115 years or so, which is a good track record.

Plus we have redeemability into any of our coin or bar products, although this may be difficult to do via a foreign broker.

Hopefully my 401k brokerage window will allow ETF transactions on a foreign stock exchange.

The fact that PMGOLD is not a conventional stock but a structured product there may be some problems if they aren't that flexible.

[sophie]

This might be a dumb question, but how do you buy PMGOLD shares from a US brokerage?

Fidelity doesn't recognize pmgold or pmgold.ax.

[stuper1]

I think I forgot that I would have to pay Australian taxes when it comes time to sell, along with U.S. taxes (unless it's in my Roth IRA).  I think that is going to make this a no go, unless I'm missing something.  Does anybody know what the tax consequences would be?

[MachineGhost]

I think I forgot that I would have to pay Australian taxes when it comes time to sell, along with U.S. taxes (unless it's in my Roth IRA).  I think that is going to make this a no go, unless I'm missing something.  Does anybody know what the tax consequences would be?

There might be withholding taxes by Australia and if it is in a IRA, you will have no way to recoup it via mutual tax treaty on your tax return.

[bronsuchecki]

I think I forgot that I would have to pay Australian taxes when it comes time to sell, along with U.S. taxes (unless it's in my Roth IRA).  I think that is going to make this a no go, unless I'm missing something.  Does anybody know what the tax consequences would be?

Now this isn't tax advice nor am I an expert, but our tax office does not require the Perth Mint to withhold anything on gold held by investors with us in our Depository, so I can't see why this would apply to PMGOLD or Australian equities in general. I think you have to be a resident in Australia to have to pay tax.

[goodasgold]

Hello Bron:

The PMGold option sounds very interesting. But in considering this option, instead of all of us wading through a long prospectus, could you please summarize PMGold's total expenses, including management fees, taxes, redemption fees, brokers' commissions, etc.?

Thank you, and I join others on this forum in appreciating the PMGold option.

[bronsuchecki]

The fees are pretty straightforward, just 0.15% management fee and a buy/sell spread on the market of usually 1%. There are no sales taxes in Australia on gold.

Redemption fees (ie collecting physical) depends on what size coin/bar you take and are at our usual retail prices, but I assume this is not something overseas investors are going to do.

As to brokers fees that I don't know as it depends on your country and who your broker is.

The ISIN for PMGOLD is AU000PMGOLD8

[stuper1]

Newbie question here.  For PMGOLD, Bron mentions the 0.15% management fee and a 1% buy/sell spread.  I didn't know about the 1% buy/sell spread.  I figured that was part of the management fee.  To compare apples to apples with IAU, which has a 0.25% expense ratio, is there a buy/sell spread, or any other fee, associated with IAU besides the 0.25% expense ratio?

[rickb]

Newbie question here.  For PMGOLD, Bron mentions the 0.15% management fee and a 1% buy/sell spread.  I didn't know about the 1% buy/sell spread.  I figured that was part of the management fee.  To compare apples to apples with IAU, which has a 0.25% expense ratio, is there a buy/sell spread, or any other fee, associated with IAU besides the 0.25% expense ratio?

There's a buy/sell (bid/ask) spread for all ETFs.  IAU's averages about 0.06% (according to http://www.indexuniverse.com/sections/b ... nder-.html).

I haven't read the PDS (see http://www.perthmint.com.au/investment_gold_asx.aspx), but if the summary is correct and it is call options, then any comparison of PMGOLD with an ETF is not apples to apples. I'm not a big fan of the ETFs but each share of IAU at least indirectly corresponds to 1/100th (or so) ounce of gold that the ETF theoretically owns (there's currently about 700M shares, so there's supposed to be about 7M ounces of gold stored somewhere the ETF can point to and say "yup, that's ours - you can't trade your shares for it, but there it is").  Perhaps Bron can clear this up, but it looks like each share of PMGOLD is literally nothing more than a piece of paper (a call option) giving you dibs on somebody else's gold.

[bronsuchecki]

To clarify, the buy/sell spread is not a fee we get, by that I meant the difference between the buying and selling prices on the exchange. It is a factor in the total end cost an investor pays. IAU and GLD have very low buy/sell spreads compared to PMGOLD, which does not have the volume of trading those products do.

Often PMGOLD's spread is better than 1%, but I've used 1% as that is what our market maker always quotes at so you are guaranteed to get that as a worst case, but you may be able to do better.

Purely from a cost point of view (ignoring risk), you would need to hold PMGOLD for a few years before the saving from the ongoing management fee outweighs the higher buy/sell spread.

rickb - I think it is funny to consider the other ETFs as not being "a piece of paper"! When we were designing PMGOLD we had a choice of creating a company/trust or creating a "structured product". The reason we went with the structured product way (ie defining it as fully paid call option for physical) was that it had lower operating costs (hence the 0.15%) and it allowed funds who could not hold physical (or buy an ETF with a trust holding physical) to buy it.

While it is defined as a call option, you pay the full gold amount upfront and we use that to buy gold to 100% back it. PMGOLD is effectively a securitised version of our unallocated, ie it is backed by metal we use in our business. In addition, that liability to PMGOLD holders also comes under our Government guarantee.

[rickb]

When we were designing PMGOLD we had a choice of creating a company/trust or creating a "structured product". The reason we went with the structured product way (ie defining it as fully paid call option for physical) was that it had lower operating costs (hence the 0.15%) and it allowed funds who could not hold physical (or buy an ETF with a trust holding physical) to buy it.

Are you saying it's deliberately set up to avoid owning gold, so that funds that (for whatever reason) are prohibited from owning gold can (sort of) pretend to own gold?  If it's set up so that it doesn't actually own any gold, and what I want is to own gold, then why on earth would I ever buy it?

I still haven't read the PDS, and may not.  Frankly, the ETFs are complicated enough.  Why does it have to be so complicated?  Doesn't Perth already effectively have 0 inventory costs (by selling unallocated)?  What is the point of yet another mechanism?  Is Perth's working gold supply now effectively sold twice, once as unallocated and again as PMGOLD - and you're gambling that the holders of unallocated and the holders of PMGOLD won't both want their gold at the same time? 

If the music stopped, right now, how many chairs really exist?  Just as many as the number of players?  Half as many as the number of players?  Less than that?

I don't mean to be rude, but PMGOLD strikes me as something I wouldn't touch with a 10 foot (or 3 meter) pole.  And, it makes me seriously wonder about Perth's unallocated as well.

[Pointedstick]

Frankly, the ETFs are complicated enough.  Why does it have to be so complicated?

[...]

If the music stopped, right now, how many chairs really exist?  Just as many as the number of players?  Half as many as the number of players?  Less than that?

Bingo. That's why physical gold in your own possession is important. You're losing out on a lot of its disaster insurance properties if you can't be sure your own policy will survive the disaster.

[bronsuchecki]

I said it was a "version" of our unallocated, not that is was unallocated sold twice.

If someone buys 10 ounces of unallocated directly from us in our Depository, we go out and buy 10oz of gold and use that in the factory. If someone else buys 1000 PMGOLDs, we go out and buy 10oz of gold and use that in the factory. We then have 20oz of physical in our factory and owe 10oz to our Depository client and 10oz to our PMGOLD holder.

In fact PMGOLD is much simpler in structure than and ETF, as the only people involved are the market maker and the Perth Mint. It is a simple contractual right you have to call for physical gold directly on the Perth Mint. With and ETF you have a Sponsor, Trustee, Custodian and Authorized Participants with you holding shares in a Trust that actually owns the gold. See http://www.perthmintbullion.com/au/blog ... anics.aspx where I discuss some of the issues with ETFs.

The point of another mechanism was that some investors prefer to use the stock exchange to buy gold, as it does not require them to open an account directly with us and they can have it in one place along with their equity investments.

[stuper1]

Is there a way of seeing what the buy/sell spread is at any given time, so I can try to time my purchase when it is low?

Will the buy/sell spread when I go to sell (hopefully many, many years down the road) affect my final total fees for this portion of my gold?

[goodasgold]

The expenses of PMGold are highly attractive. In fact, they are the lowest of any gold investment I know of.

But I am not an Australian citizen, and the downside is that PMGold is denominated in Australian dollars. Since exchange rates vary over time, non-Australians investing in PMGold are subject to currency risk.

I remember traveling in South America about 12 years ago. I met an Australian who complained bitterly that the value of the Australian dollar had plummeted to the point that it was only worth 50 cents in U.S. dollars. Now, in 2013, the Australian dollar is very strong, but this situation could change rapidly. If the Chinese economy tanks, for example, Australia's natural resource-based economy would fall too, with dire consequences for the value of the Ozzie dollar.

So I reluctantly conclude that PMGold is not for me. But PMGold would be a great buy if it could establish a USD denominated fund, as is done by some of the Canadian gold ETFs which market USD denominated investments.

[bronsuchecki]

stuper1 - any online broker should show both bid and ask for any exchange quoted product/stock. Note PMGOLD is traded in Australian hours.

goodasgold - when you buy PMGOLD or any ETF on any market you do not have any currency risk because you are holding a product denominated in ounces, not AUD or USD or any other currency. Where the ETF trades does not effect you.

Consider these two points in time:

On Feb 18 2009 AUD gold price was $1532; AUD/USD FX rate was 0.6389
On Nov 25 2009 AUD gold price was $1279 and AUD/USD FX rate was 0.9250

(note if Aussie dollar weakens the AUD gold price goes up, and vice versa).

From a US investors point of view, when buying on Feb 18 their broker converts $1532 @ 0.6389 into USD 979. That is what you pay and what you get is 1 ounce.

When you sell, the broker converts $1279 @ 0.9250 into USD 1183. So you made $204 even though the Aussie price of gold went down.

You're missing the point that gold is traded in USD - it is foreign investors who have exposure to their local currency's impact on their local gold price.

[stuper1]

Bron, thanks for all the good info.  I am very new to this subject, so please forgive me if I ask silly questions.  My broker can show me the bid/ask spread when I buy now, but is my total fee for that gold allotment also going to depend on the bid/ask spread at the time I sell years down the road?

[bronsuchecki]

stuper1 - under the Australian Securities Exchange rules we have to maintain fair buy and sell prices for PMGOLD at all times. We have contracted Deutsche Bank to do that for us (as we don't have direct access to the ASX) and they always have a bid and ask in the market at all times. So it is not like some closed end fund where you are at the mercy of the market and the price could go to a discount to fair value.

[goodasgold]

stuper1 - any online broker should show both bid and ask for any exchange quoted product/stock. Note PMGOLD is traded in Australian hours.

Thanks, Bron, for clarifying this point. My next inquiry is how to buy PMGOLD through the ASX. I called my broker, Scottrade, and they said they could not assist in this purchase. Any suggestions as to available U.S. brokers would be appreciated.

[bronsuchecki]

I'm not really familiar with the US brokerage business, so don't know who offers access to overseas stock exchanges.

[MachineGhost]

Thanks, Bron, for clarifying this point. My next inquiry is how to buy PMGOLD through the ASX. I called my broker, Scottrade, and they said they could not assist in this purchase. Any suggestions as to available U.S. brokers would be appreciated.

E*Trade probably has access.  I remember seeing advertising about it.

[smurff]

Interactive Brokers also offers access to overseas exchanges, including ASX.

[goodasgold]

Thanks to MG and Smurff for your information about brokers to assist in buying PMGOLD on the Australian stock exchange.

And another question concerns the expenses PMGOLD investors will pay for converting between USD and Australian dollars when buying and selling. Can anyone provide info on this question?

I value HB's advice to place some gold offshore, and right now I am debating whether to invest in PMGOLD or GTU, a Canadian company that buys and sells in US dollars but stores its gold in Canada. The expense ratio of GTU is about .36%, while PMGOLD is only .15%. A key point in deciding between the two will be the expense, mentioned above, of converting between USD and Australian dollars.

[bronsuchecki]

goodasgold - you do want to check that the FX rates being used are reasonable and don't have a large buy/sell spread themselves as that is a form of hidden cost. Even with tight FX rates, the fact is that PMGOLD on the buy and sell will probably cost more because there is an FX leg involved plus PMGOLD does not run as tight on its buy/sell spread as the US traded products which have a much larger and competitive market that squeezes spreads.

The key to your decision is how long you are planning on holding the gold. If it is only a few years then go with the local products. If longer than the lower ongoing fee of PMGOLD starts to add up. For example, the 0.21% difference between GTU and PMGOLD over 5 years is 1.05% saved.