Do I need a Gold ETF in my PP?

Discussion of the Gold portion of the Permanent Portfolio

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tdepaula
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Do I need a Gold ETF in my PP?

Post by tdepaula » Mon Dec 29, 2014 4:30 pm

Hello there folks,

I have began implementation of my permanent portfolio after many months of reading about it.  In total, my PP right now will have a total value of around 60k (divided up in 25% increments per asset class as the strategy calls for) when I finish implementation.

I have opted for simplicity: I have my stock investment in a total stock market index fund with Vanguard and my cash (Tbills) and LT Treasuries with Treasury Direct.  Now, time has come for me to deal with the gold portion of the plan.

My plan is to buy 10 to 11 gold coins, probably American Eagles, and keep them in a safe deposit box at a local bank and insure the box holdings through http://www.hughwood.com/.

Now here's my question: do I NEED a Gold ETF?  Is rebalancing without a Gold ETF really that difficult?  What does it entail?  How do people that hold Gold and not ETFs rebalance?  And how do people with Gold ETFs rebalance?  People on this forum and elsewhere have made it seem like having most of my holdings in physical gold and SOME of my holdings in a Gold ETF really would make things simpler for me.  I would love to hear some perspectives about this?  If adding a Gold ETF to my plan is really recommended, which one should I go with?  I have heard about GLD and IAU.  What are the costs of keeping these funds (I have a general understanding of the risks).

Thanks!
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lordmetroid
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Re: Do I need a Gold ETF in my PP?

Post by lordmetroid » Mon Dec 29, 2014 4:59 pm

I would stay away from Gold ETFs because gold is supposed to play the role of ultimate insurance when the zombie apocalypse occurs. Gold coins can be carried on your person while an ETF can not.

I would recommend you to buy your gold as cheap as possible. Canadian Maple Leaf coins seems like an excellent option in my opinion as one gets more gold per dollar compared to the American eagle. When you want to rebalance the portfolio you simply sell a portion of your stack to the shop which offers you the most money.
Last edited by lordmetroid on Mon Dec 29, 2014 5:03 pm, edited 1 time in total.
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stpeter
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Re: Do I need a Gold ETF in my PP?

Post by stpeter » Mon Dec 29, 2014 5:10 pm

As far as I can see, the only reason to hold a gold ETF is if you have a lot of money tied up in tax-deferred instruments, such as a 401(k) plan or IRA.
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Re: Do I need a Gold ETF in my PP?

Post by Ad Orientem » Mon Dec 29, 2014 6:25 pm

In general you want to have all or most of your gold physical. That said ETFs can make sense for people who are small investors with a low value PP, where rebalancing with physical could be problematic (i.e. maybe the gold component would only be a few coins). I could see using an ETF there until the PP got large enough to support at least five or six coins.

The very wealthy, for whom one or two safe deposit boxes might not be adequate for their gold, have their own issues. But there are other physical storage options for people afflicted with such horrible problems.
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Re: Do I need a Gold ETF in my PP?

Post by rickb » Tue Dec 30, 2014 12:16 am

tdepaula wrote: My plan is to buy 10 to 11 gold coins, probably American Eagles, and keep them in a safe deposit box at a local bank and insure the box holdings through http://www.hughwood.com/.
IMO, this is a very good plan.
tdepaula wrote: Now here's my question: do I NEED a Gold ETF?
Absolutely not.
tdepaula wrote: Is rebalancing without a Gold ETF really that difficult?  What does it entail?  How do people that hold Gold and not ETFs rebalance?
If all you own is coins, then to rebalance you either sell coins, or buy more.  You can almost always sell them wherever you purchased them.  If this is a local dealer then you take your coins to the dealer and they give you cash.  If it's an online dealer, you go through their "buy"machinations (generally they quote you a price, you ship the coins to them via UPS or FedEx or whatever, and then they send you a check).  You don't have to sell where you bought - you can sell anywhere (you might figure out where you net the most).
tdepaula wrote: And how do people with Gold ETFs rebalance? 
If you own shares in an ETF, to sell you sell shares in the ETF (like selling a stock).  To buy, you buy shares.  You can do it online, no need to leave your keyboard.  No shipping.  No driving to a local dealer.  But you didn't have physical possession of your gold either.
tdepaula wrote: People on this forum and elsewhere have made it seem like having most of my holdings in physical gold and SOME of my holdings in a Gold ETF really would make things simpler for me.  I would love to hear some perspectives about this?  If adding a Gold ETF to my plan is really recommended, which one should I go with?  I have heard about GLD and IAU.  What are the costs of keeping these funds (I have a general understanding of the risks).
The gold ETFs are all in the 0.25% (IAU) to 0.4% (GLD) annual expense range (SGOL is another one, its ER is currently 0.39%).  The number of shares you own slowly decreases over time.  This is in addition to whatever trading costs your broker charges you.

Another option is the gold closed end funds, GTU and PHYS.  Unlike the ETFs which maintain a constant (but ever dwindling) gold to share ratio and a constantly varying number of shares and amount of gold (which tends to keep their NAV aligned with the price of gold), these funds maintain a (relatively) constant amount of gold and shares which makes their shares subject to trading at a premium or (rarely) discount relative to the NAV.  For example, GTU is currently trading at about a 8% discount (each share is trading for about 8% less than the market price of the gold the share corresponds to).  These funds are far simpler, and far more transparent than the gold ETFs, but the tradeoff is they don't track the price of gold as closely (so when you buy or sell you really need to pay attention to the current premium/discount).  An advantage is that gains on these funds can be taxed at capital gains rates (rather than collectibles rates), but you have to file an additional IRS form every year you own them (Form 8621).  Capital gains rates currently max out at about 19% while collectibles rates max out at 28%.   
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Re: Do I need a Gold ETF in my PP?

Post by Libertarian666 » Tue Dec 30, 2014 9:24 am

rickb wrote:
Another option is the gold closed end funds, GTU and PHYS.  Unlike the ETFs which maintain a constant (but ever dwindling) gold to share ratio and a constantly varying number of shares and amount of gold (which tends to keep their NAV aligned with the price of gold), these funds maintain a (relatively) constant amount of gold and shares which makes their shares subject to trading at a premium or (rarely) discount relative to the NAV.  For example, GTU is currently trading at about a 8% discount (each share is trading for about 8% less than the market price of the gold the share corresponds to).  These funds are far simpler, and far more transparent than the gold ETFs, but the tradeoff is they don't track the price of gold as closely (so when you buy or sell you really need to pay attention to the current premium/discount).  An advantage is that gains on these funds can be taxed at capital gains rates (rather than collectibles rates), but you have to file an additional IRS form every year you own them (Form 8621).  Capital gains rates currently max out at about 19% while collectibles rates max out at 28%. 
Actually I believe there is a special 3.8% "Obamacare" tax that applies to investment income in high tax brackets, including capital gains, which means that the max Federal "normal" capital gains tax bracket is almost 24%, whereas the "collectibles" rate maxes out at almost 32%.

But I could be wrong; consult your tax advisor, etc.
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Re: Do I need a Gold ETF in my PP?

Post by rickb » Tue Dec 30, 2014 10:07 am

rickb wrote:
If all you own is coins, then to rebalance you either sell coins, or buy more.  You can almost always sell them wherever you purchased them.  If this is a local dealer then you take your coins to the dealer and they give you cash.  If it's an online dealer, you go through their "buy"machinations (generally they quote you a price, you ship the coins to them via UPS or FedEx or whatever, and then they send you a check).  You don't have to sell where you bought - you can sell anywhere (you might figure out where you net the most).
And, speaking of taxes - if you sell coins at a profit you probably won't get a 1099 but you're still obligated to report the gain (so, you need to keep track of how much you paid) and pay the collectibles tax. 
tdepaula
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Re: Do I need a Gold ETF in my PP?

Post by tdepaula » Tue Dec 30, 2014 11:10 am

Folks, thank you so much for your replies.  They are all very helpful to me.  Given my current financial situation, I'm leaning towards just holding physical gold now (in a safety deposit box / insured). I appreciate the time you have each taken in addressing my many questions.
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