I still don't understand why you need to hold physical gold

[sophie]

Setting aside the arguments for gold as an inflation hedge the question seems to be why physical? Physical gold is the financial equivalent to catastrophic health insurance...

HB did indeed point out that the times that gold would be needed most are precisely those times with significant political, financial or social upheaval.  It isn't only about "Mad Max" scenarios, though.  Counterparty risk can occur on much smaller scales.  Take MF Global for example.  I still worry that there are bad precedents being set in the lack of legal consequences for clearly illegal financial maneuvers.

There's also the expense ratios of ETFs.  Aside from the safe deposit box rental, physical gold incurs no expenses.  Over long periods of time, expense ratios will make a gold investment wither away, as it (uniquely) does not pay interest or dividends.  Inevitably, this must produce a gradually increasing tracking error.  I wonder if it hasn't shown up yet only because the ETFs haven't been around long enough, and have yet to experience a serious downturn in gold prices.

Of course, this comparison only applies to taxable accounts.  Despite the drawbacks, ETFs make perfect sense in a tax-advantaged account where physical gold isn't really an option.

[Pointedstick]

HB did indeed point out that the times that gold would be needed most are precisely those times with significant political, financial or social upheaval.  It isn't only about "Mad Max" scenarios, though.  Counterparty risk can occur on much smaller scales.  Take MF Global for example.  I still worry that there are bad precedents being set in the lack of legal consequences for clearly illegal financial maneuvers.

The lesson I take from this shameful debacle is never to be financially involved with any enterprise run by a current or former politician, especially not one at the federal level, and especially especially not one who ran a notoriously dirty, corrupt state. Counterparty risk is present everywhere, of course, but IMHO the likelihood of getting hurt entrusting your money to a firm run by a politician who just got kicked out of office handily exceeds that of using a cactus as a stepstool.

[MachineGhost]

There's also the expense ratios of ETFs.  Aside from the safe deposit box rental, physical gold incurs no expenses.  Over long periods of time, expense ratios will make a gold investment wither away, as it (uniquely) does not pay interest or dividends.   Inevitably, this must produce a gradually increasing tracking error.  I wonder if it hasn't shown up yet only because the ETFs haven't been around long enough, and have yet to experience a serious downturn in gold prices.

Don't forget insurance.

Premiums are actually higher if held in a bank safety deposit box.  What's that tell you?

[sophie]

HB did indeed point out that the times that gold would be needed most are precisely those times with significant political, financial or social upheaval.  It isn't only about "Mad Max" scenarios, though.  Counterparty risk can occur on much smaller scales.  Take MF Global for example.  I still worry that there are bad precedents being set in the lack of legal consequences for clearly illegal financial maneuvers.

The lesson I take from this shameful debacle is never to be financially involved with any enterprise run by a current or former politician, especially not one at the federal level, and especially especially not one who ran a notoriously dirty, corrupt state. Counterparty risk is present everywhere, of course, but IMHO the likelihood of getting hurt entrusting your money to a firm run by a politician who just got kicked out of office handily exceeds that of using a cactus as a stepstool.

So those farmers got what they deserved?  I suppose.  Although, corruption in New Jersey pre-existed Corzine's tenure so it's not quite fair to blame him for it.  It's a long and glorious tradition, dating back to the famous sailboat race between NY and NJ governors, with Staten Island as the stake (NJ lost, if you hadn't guessed).  In fact he is the only governor in living memory who took steps to get it under control, by initiating legislation against "pay to play" contracting and cleaning out a state medical school (UMDNJ) whose administrators were routinely stealing money.

The problem is, though, that brokerages that don't fit your description might look at the MF Global outcome, not to mention the complete lack of any serious investigation of Goldman and the other investment houses that had a hand in the mortgage securities debacle, and figure that they can get away with such hanky panky too.  I mean, what do you have to do to get prosecuted if stealing billions from your customers doesn't cut it?  So I suspect that counterparty risk that is short of total systemic failure has increased greatly over the past few years.

[Pointedstick]

So those farmers got what they deserved?  I suppose.  Although, corruption in New Jersey pre-existed Corzine's tenure so it's not quite fair to blame him for it.  It's a long and glorious tradition, dating back to the famous sailboat race between NY and NJ governors, with Staten Island as the stake (NJ lost, if you hadn't guessed).  In fact he is the only governor in living memory who took steps to get it under control, by initiating legislation against "pay to play" contracting and cleaning out a state medical school (UMDNJ) whose administrators were routinely stealing money.

Farmers? I don't think anybody got what they deserved; nobody ever deserves to have their money stolen, even if they were being reckless or stupid. But I do think that we should learn from this that politicians who run firms believe (rightly or wrongly) that their friends, allies, and connections in the political sphere will protect them from the consequences of their actions. That's certainly what happened with MF global, I believe. If it had been some nobody CEO running the place, I think there would have been a higher likelihood of a prosecution. Also if Corzine has been a Republican, but that's another story. 

The problem is, though, that brokerages that don't fit your description might look at the MF Global outcome, not to mention the complete lack of any serious investigation of Goldman and the other investment houses that had a hand in the mortgage securities debacle, and figure that they can get away with such hanky panky too.  I mean, what do you have to do to get prosecuted if stealing billions from your customers doesn't cut it?  So I suspect that counterparty risk that is short of total systemic failure has increased greatly over the past few years.

That's certainly true, and I agree it's a genuine risk. I just think that you're a lot more likely to see firms with political connections get bailed out or avoid prosecution firms without them. So I try to avoid politically-connected financial institutions.