Comparing the Three Physical Gold ETFs

[Drewskers]

There's a new article up on Seeking Alpha that compares three physically-backed gold ETFs available in the US. Goes into a lot of detail about auditing, custodianship, physical storage, quality of gold, etc. The best article I have seen on the topic!

http://seekingalpha.com/article/237748- ... sb_picks_2

[MediumTex]

There is some good general information in that article.

It's nice to read an article about the gold ETFs that isn't trying to either sell you gold or make you think the ETFs are a scam.

[steve]

This is a good article
Our Take on the Two Gold Closed-End Funds
http://news.morningstar.com/articlenet/ ... ?id=355386

[rwc356]

It is good to have a simple factual comparison of the various options. It would seem gold storage outside the United States would help achieve a portion of the off-shore target within the PP concept.

[KevinW]

Yeah, it's nice to have that all summarized in one place, rather than sifting through the prospectuses of the funds.

Something I'm still wrestling with is, a) whether it will ever matter which country the gold is held in, and b) if it ever does matter, whether one of the fund's strategies could work any better than the others.

[smurff]

Something I'm still wrestling with is, a) whether it will ever matter which country the gold is held in, and b) if it ever does matter, whether one of the fund's strategies could work any better than the others.

I wrestle with that, too, Kevin.  For years prudent financial advisors like HB have recommended that one keep a portion of one's assets outside of the country where one is living.  (Some go even further and recommend living a life where the bulk of one's money is in one country, one's passport is from another, and one's domicile is in a third.  Supposedly doing this can mean living free of income taxes.  There is a name for this strategy, Perpetual Traveler,  maybe Permanent Traveler, but I'm not sure.  But that's a topic for another day.)

I think about what the USA does whenever it has a major dust-up with another country:  Gets the UN to impose trade sanctions, then freezes the assets that the country--and sometimes, de facto, its non-USA-resident citizens--has on deposit in the USA until the hostilities and disputes are over, sometimes taking decades to sort out.  That's what happened to Iran back in the 1970s when they took hostages at the American Embassy, and Libya in the 1980s (after a variety of offenses, ranging from bombing a USA military barracks in Germany to the PanAm plane bombing over Lockerbie, Scotland).  The UK did it to Rhodesia in the 1960s (independence) and to Argentina in the 1980s (over the Falkland Islands war).    BTW, one result of doing this is that the Americans affected by the actions of that other nation can sue and have assets they can claim if they win. 

I doubt that the USA and UK are the only countries that do this sort of thing, but I can think of many examples that apply to them.  Think about what the UK did when Icesaves went bust and Iceland refused to pay back depositors--the UK even used "anti-terrorism" legislation against Iceland, a friend and NATO ally, to justify their act of freezing Landsbanki funds on British land.  Not quite the same as freezing all the country's assets in the UK, but the act was in the same neighborhood as that.

So what would happen if another country, in a big dust-up with the USA, decided to do likewise with American citizens' assets on deposit in that country?  What if the USA decided to freeze your overseas bank's assets in the USA, and that country retaliated by freezing American citizens' assets on that country's land?

What if the deposits were all "allocated" or even stored in a private safety deposit box, but came under even a relatively innocent threat?  Say, for example, that the bank where you kept your gold hoard went bust and was sold, and the condition of the sale was that all safety deposit boxes had to be emptied of their contents within 60 days of the sale.  (Safety box contents are not assets of the bank, but the new owners have decided to not pursue a business model that includes private depository box services.)  You find out while you're recuperating from surgery in your hospital bed, but totally unable to travel abroad in time for the deadline.  What happens then?

What if there is another UBS (formerly Union Bank of Switzerland) situation, where a bank employee steals the list of box-holders and sells it to an interested government (like the USA federal government) in exchange for not being charged with a crime, or being charged with a lesser crime?  What if the bank where you have your box decided to no longer deal with American customers and asks you to empty your box within 30 days?  What if TSHT and Australia freezes Perth Mint Certificates, or requires them to be paid in Australian dollars at an unfavorable exchange rate?

I realize that's a lot of "what if." 

And I thoroughly understand why HB recommended keeping some assets outside your country:  Governments have a way of doing expedient and stupid things without regard for the consequences to you as an individual. It's good to not be 100% in their clutches.  But it's not just the USA governments that do this, other governments, including traditional allies, do expedient and stupid things, too.

[craigr]

And I thoroughly understand why HB recommended keeping some assets outside your country:  Governments have a way of doing expedient and stupid things without regard for the consequences to you as an individual. It's good to not be 100% in their clutches.   But it's not just the USA governments that do this, other governments, including traditional allies, do expedient and stupid things, too.

All governments can do things to steal from citizens at any time. But some governments and societies have much less of a history of doing these things than others (e.g. Switzerland). We don't know what some government may do in the future, but certainly looking at how they reacted to emergencies and crises in the past may provide a glimpse. Geographic diversification today means more also than a government seizing/freezing assets. It may also protect you against terrorist activity in major financial centers in the US, major hacking incidents (like a bad worm) that targets and destroys financial record keeping etc. Yes, these companies have systems in place to hopefully deal smoothly with these incidents. But during the chaos assets may be unable to be accessed easily. Having some assets in another country like Switzerland (even if not perfect Harry Browne Swiss Style but in some electronic form) provides some additional diversification against risks of concentrating wealth in your home country.

[Drewskers]

I think this idea of physical geographical diversification is completely moot in the current era. If there is a massive breakdown of systems in the US due to terrorism or war, there is little reason in this day and age to think the same factors won't also cause a massive breakdown of systems worldwide - either directly, or indirectly. A cyber-attack directed at US banking systems would certainly wreak havoc with banking systems worldwide. If one is thinking they are going to be able to wire funds from Switzerland, or go collect them in person, there's likely a rude awakening in store. And if there's ever a Third World War, or asteroid hit from outer space, mere survival will be the order of the day for years to come - not wealth preservation!

My personal thought about such matters is that if I really believed this sort of diversification was desirable, then I should really own physical gold (stored in a safe at my residence - not in a safe depost box that I could be denied access to in the event of things going seriously wrong).

D.

[craigr]

I think this idea of physical geographical diversification is completely moot in the current era. If there is a massive breakdown of systems in the US due to terrorism or war, there is little reason in this day and age to think the same factors won't also cause a massive breakdown of systems worldwide - either directly, or indirectly. A cyber-attack directed at US banking systems would certainly wreak havoc with banking systems worldwide. If one is thinking they are going to be able to wire funds from Switzerland, or go collect them in person, there's likely a rude awakening in store. And if there's ever a Third World War, or asteroid hit from outer space, mere survival will be the order of the day for years to come - not wealth preservation!

I don't think it is moot at all. Different countries will react to protect their own interests in a crisis. Even if you are not able to access the funds immediately, they still are there and could be accessed at some point.

There are always extremes such as war, etc. But those are issues to be considered if they happen. There is no way to plan for those types of events ahead of time except to have options available to respond in a flexible way. It may be that you can't wire funds, but at the same time those assets could at least be somewhat isolated from the problems in waiting.

In 2008 many very large US banks were on the brink of collapse. Electronic versions of runs on banks were happening behind the scenes. It is not unreasonable to think that some kind of banking "holiday" was being considered if the system wasn't stabilized. It was also not unreasonable to think that enough of these banks going under could severely hamper the ability of FDIC to respond adequately. So in that case alone it was probably worth considering having some assets outside the US banking system as being a good idea.

My personal thought about such matters is that if I really believed this sort of diversification was desirable, then I should really own physical gold (stored in a safe at my residence - not in a safe depost box that I could be denied access to in the event of things going seriously wrong).

Holding some gold directly in a secure way is not a bad idea. But at some point the logistics and safety of doing so becomes a problem. In those cases you'll want to use a bank because the risk of having the gold stolen is much higher than some of these other scenarios.

[rwc356]

Today's (11/26) closing results for GLD (-0.80%) and IAU (-1.08%) was surprising in the variance or tracking error between the two. Even more surprising is the fact that M* shows GLD with a 0.12% premium while IAU has a -0.26% discount. This is the first time I noticed such a big variance.

With the recent article in the Wall Street Journal regarding the rapid growth of GLD into one of the largest ETF's - it makes me consider whether GLD or IAU is a more accurate reflection of gold's market value. If you own GLD are you subject to an element of investor exuberance (reflected in the premium) which could magnify a downturn if investor sentiment turns against gold? It seems like this adds an additional element to be considered in comparing the gold options.

I am currently transitioning into the PP and have holdings in both GLD and IAU. Should I consider the premium/discount factor for my future gold investments?

Bob

[Drewskers]

It's true that today was the biggest discrepancy in NAV between GLD and IAU in a while, but it is by no means the largest historical discrepancy between the two:

http://stockcharts.com/h-sc/ui?s=IAU:GL ... 5831233559

Interesting how the variation between the two funds has been increasing the past few months.

I don't know what to make of it.

D.

[KevinW]

Well, what I'm wrestling with, is whether IAU's low expense ratio makes it the best deal bar-none, or if GLD or SGOL provide some measure of safety commensurate with their higher expenses.

There seem to be two categories of scenario where geographic policy could make a difference: if the vault is physically destroyed due to natural disaster, war, nuclear strike, etc.; or if your home country starts freezing or confiscating gold through the political process.  The first scenario is nigh impossible to predict, so it seems the best you can do is diversify regionally, which IAU does internally.

GLD's and SGOL's vaults are outside the US, which would seem to help in the second scenario.  However State Street is a US company and GLD trades on NYSE in NYC.  ETFS is based in the UK, but again SGOL trades on NYSE, and SGOL's custodian (JP Morgan) is a US company.  It seems that all three could fall under the jurisdiction of the US government.  So I'm not sure whether GLD or SGOL would really be any safer than IAU if push came to shove.

[Storm]

Unless you live in a foreign country, your stock certificates for GLD, IAU, and SGOL are all stored at your brokerage in the US.  If the US Government really wanted to, it's far easier for them to just seize 401k assets, IRAs, or individual brokerage account stock certificates than it is to try to take gold from a vault in Switzerland.

Just do what I do and diversify across all 3 in case one of them happens to go into default or some other such nonsense.

Protect yourself where you can, if Fidelity and Vanguard go under, we could have our entire retirement wiped out, then what?  Try not to worry too much about the extreme situations - it will make you paranoid.

[escafandro]

Can someone please explain me what this note means and implies?
That I received form my broker today regarding to PHYS.

I quote:
SPROTT PHYSICAL GOLD TR HAS ANNOUNCED A VOLUNTARY REDEMPTION.
MONTHLY REDEMPTION PRIVILEGE (2012)

OPTION 1: MONTHLY REDEMPTION (CASH)
UNITHOLDERS WHOSE UNITS ARE REDEEMED FOR CASH WILL BE ENTITLED TO RECEIVE A REDEMPTION PRICE PER UNIT EQUAL TO 95% OF THE LESSER OF (I) THE VOLUME WEIGHTED AVERAGE TRADING PRICE OF THE UNITS TRADED ON THE NYSE ARCA OR IF TRADING HAS BEEN SUSPENDED ON THE NYSE ARCA, THE TRADING PRICE OF THE UNITS TRADED ON THE TSX, FOR THE LAST FIVE DAYS ON WHICH THE RESPECTIVE EXCHANGE IS OPEN FOR TRADING FOR THE MONTH IN WHICH THE REDEMPTION REQUEST IS PROCESSED AND (II) THE NAV OF THE REDEEMED UNITS ON THE LAST DAY OF SUCH MONTH ON WHICH THE NYSE ARCA IS OPEN FOR TRADING.

REDEMPTION DEADLINE: ON THE 15TH DAY OF THE MONTH IN WHICH THE CASH REDEMPTION NOTICE WILL BE PROCESSED OR, IF SUCH DAY IS NOT A BUSINESS DAY, THEN ON THE IMMEDIATELY FOLLOWING DAY THAT IS A BUSINESS DAY.

VALUATION DATE:
ON THE LAST DAY OF SUCH MONTH ON WHICH THE NYSE ARCA IS OPEN FOR TRADING.

REDEMPTION PAYMENT DATE:
CASH REDEMPTION PROCEEDS WILL BE TRANSFERRED TO A REDEEMING UNITHOLDER APPROXIMATELY THREE BUSINESS DAYS AFTER THE END OF THE MONTH IN WHICH SUCH REDEMPTION REQUEST IS PROCESSED BY THE TRUST.

[Ad Orientem]

Excellent FYI article. Thanks for posting.

[bronsuchecki]

It's true that today was the biggest discrepancy in NAV between GLD and IAU in a while, but it is by no means the largest historical discrepancy between the two:

http://stockcharts.com/h-sc/ui?s=IAU:GL ... 5831233559

Interesting how the variation between the two funds has been increasing the past few months.

I don't know what to make of it.

It is because the two ETFs have different management fees, and as they "pay" for these management fees by selling gold from the fund, the actual amount of gold each share is entitled to declines at different rates (it is a common mistake to assume GLD = 0.10oz, it doesn't, it is currently = 0.097034oz).

The point of divergence in the chart I think you will find will equal the date IAU reduced its management fee from 0.39% to 0.25%. Prior to that the ratio of their NAVs would be equal because both ETFs were deducting gold from each share at the same rate.

This contrasts with the method the Perth Mint employs for its Australian Stock Exchange listed gold ETF (code: PMGOLD) where we deduct whole shares from holder's accounts at a ratio of 1 share for every 667 (equal to the management fee of 0.15%) and keep the gold backing each share constant at 0.01oz.