Gyroscopic Investing

I currently hold GLD for the gold portion of my PP.  While I know that physical gold is the best option, it is impractical for me.  So it seems that ETFs are my best option. If that is the case, does anyone have any strategies for ETF diversification?  Do the other gold ETFs have the same risks as GLD?  Should I diversify my gold holding amongst the other ETFs?  Problem is, I certainly don't want to sell any of my GLD right now and have to pay 28% taxes just to diversify.  But if GLD holds great risk in a market crash, maybe it might be worth it. 

This is a very long, interesting opinion piece about gold http://www.ritholtz.com/blog/2011/09/your-gold-teeth/ 

There are a couple paragraphs in the piece that reiterated my concerns about the GLD ETF:

For example, the SPDR Gold Trust, which is reputed to have the sixth largest inventory of gold in the world, is a Grantor Trust contractually obligated to deliver to its shareholders a dollar-equivalent gold value in the form of each day’s closing share price. Doug Hornig of Casey Research recently researched GLD by scrutinizing its prospectus and interviewing its sponsor. He concluded that ownership in it, even among investors holding more than 100,000 shares pre-approved for share/gold conversion, does not practically constitute gold ownership for shareholders. Were there to be a sudden run on physical gold that would close gold futures trading, GLD’s sponsor would not be able to open the shares for trading. All credits and debits would be reconciled in dollars. In the US any long-term profits would be taxed at the 28% tax rate on collectibles. So we think there is considerable room for disappointment among ETF holders that believe they have adequate exposure to physical gold or the performance of physical gold if and when that exposure is most needed.

We view this as a potential powder keg that will lead to sudden sponsorship of gold miner shares, analogous with the bullish argument associated with large short interest in a stock (only better). ETF shareholders are already sold on the merits of having long gold exposure. What they lack currently is the knowledge that they own a vehicle that would not provide them the benefits of gold when they need it most. We expect re-allocation from ETFs to gold miner shares as this becomes known.

 
Any and all thoughts are welcome.

I would buy into GTU or PMGOLD. GTU has been around for decades, and PMGOLD is backed by the government of Australia. I highly doubt the government of Australia is running a Ponzi scheme, but GLD could very well be. We will find out when/if the price of gold plummets and people cash out of it. Also PMGOLD has a .15 expense ratio. The only drawback is that it is only traded in Australia.

What you're describing is counterparty risk: that the fund sponsors might be unwilling or unable to do what you expect them to do.  That risk is inherent in any fund so the only way to eliminate it completely is to hold the underlying assets yourself.

If buying bullion is not an option, then yes, you can compartmentalize the counterparty risk associated with a single fund sponsor by diversifying into multiple sponsors.

Personally I don't think there's much of a benefit to this.  I think it's unlikely that any of the well known gold funds will blow up.  If that did happen, I can imagine scenarios where one would blow up and investors would eventually be made whole.  And I can imagine scenarios where everything breaks at once and all the gold funds blow up, and diversification doesn't help in that case.  But I can't think of many scenarios in between when one gold fund blows up and all the rest keep working properly.

So I think there's a strong argument for holding most or all of your gold directly, but less of a case for diversifying across multiple gold ETFs.  But if doing so makes you feel more comfortable, by all means do so.

KevinW wrote: I think it's unlikely that any of the well known gold funds will blow up.

HSBC is the primary custodian of GLD.  They also have one of the largest short positions on gold on the COMEX.  If the price of gold ran away to the upside, and the COMEX longs forced the shorts to deliver, what do you think would happen?  Would HSBC happily go bankrupt, or would they find some way to use GLD's gold to satisfy their COMEX delivery obligation - and if they did, what would be the impact on GLD's share holders?

I don't know why, but this image of a fox guarding a hen house keeps popping up in my mind.

HSBC is the primary custodian of GLD.  They also have one of the largest short positions on gold on the COMEX.  If the price of gold ran away to the upside, and the COMEX longs forced the shorts to deliver, what do you think would happen?  Would HSBC happily go bankrupt, or would they find some way to use GLD's gold to satisfy their COMEX delivery obligation - and if they did, what would be the impact on GLD's share holders?

I don't know why, but this image of a fox guarding a hen house keeps popping up in my mind.

One of the things that I like about the PP is that it let's me sleep better at night knowing that I have protection under virtually all market conditions.  Unfortunately, gold is starting to keep me up at night because I can't physically take possession of the real thing.   

Given the constraint of not being able to take possession of the real stuff, what does everyone think is the best strategy for owning gold?  Is GLD my best option?  Perhaps it is, even with all of the risks. 

I think I'd like to diversify into some other gold investments (remember, I can't take physical gold) to mitigate the risk of the GLD ETF, but I'm not sure if that makes sense.  Any other thoughts on how to fulfill the gold portion of the portfolio while at the same time keeping the "counter party" risk to a minimum?

Thanks.

Why can't you hold physicial gold?  (Not asking to try to pressure you to buy physical gold, but just trying to figure out what your limitations are, so that I can make a relevant rec.).

scotomatic wrote: Given the constraint of not being able to take possession of the real stuff, what does everyone think is the best strategy for owning gold?  Is GLD my best option?  Perhaps it is, even with all of the risks. 

A mix of GLD, and IAU or SGOL would be safer than any of these by itself.  However, all are ETFs, and all have the "fox guarding the hen house" issue (GLD's primary custodian is HSBC, IAU's is JP Morgan, and SGOL's is also JP Morgan - JP Morgan and HSBC both have very large short positions in gold).

Another option is a closed end gold fund like GTU and PHYS.  See this thread for the difference between these funds and the ETFs.

Another option (for taxable accounts) is a gold backed bank account, like goldmoney.com or bullionvault.com.

Before putting 1/4 of your assets in any of these you should fully understand how they work, meaning:

Where is the gold actually kept?

Who has access to it (who can sell it or buy more)?

Who makes money from holding the gold, and how?

What recourse would you have (if any) in the event of a problem?

scotomatic wrote:

HSBC is the primary custodian of GLD.  They also have one of the largest short positions on gold on the COMEX.  If the price of gold ran away to the upside, and the COMEX longs forced the shorts to deliver, what do you think would happen?  Would HSBC happily go bankrupt, or would they find some way to use GLD's gold to satisfy their COMEX delivery obligation - and if they did, what would be the impact on GLD's share holders?

I don't know why, but this image of a fox guarding a hen house keeps popping up in my mind.

One of the things that I like about the PP is that it let's me sleep better at night knowing that I have protection under virtually all market conditions.  Unfortunately, gold is starting to keep me up at night because I can't physically take possession of the real thing.   

Given the constraint of not being able to take possession of the real stuff, what does everyone think is the best strategy for owning gold?  Is GLD my best option?  Perhaps it is, even with all of the risks. 

I think I'd like to diversify into some other gold investments (remember, I can't take physical gold) to mitigate the risk of the GLD ETF, but I'm not sure if that makes sense.  Any other thoughts on how to fulfill the gold portion of the portfolio while at the same time keeping the "counter party" risk to a minimum?

Thanks.

The ETFs do have some risks compared to the physical metal, but I would still consider them fairly safe.  They are certainly the most practical alternatives for retirement accounts.

If you can't take physical possession, you might consider one of the private depositories, like GoldMoney or BullionVault.  These services give some people the willies, but I consider them somewhere between physical possession and the ETFs in terms of overall safety -- probably closer to the ETF end of the spectrum.  For a variety of reasons, I think Hong Kong or Zurich are the best storage sites.

It's too bad you can't buy at least some coins or small bars -- that is far and away the safest and most meaningful way to own the metal.  Being able to hold it in your hand somehow seems to provide context.  It drives home the metal's historical permanance and helps you appreciate it's overall role in your portfolio.   

Some people like the Perth Mint, and I think you can hold a certificate in an IRA.
http://www.perthmint.com.au/welcome_to_ ... itory.aspx

Bullion Direct will hold your gold for you, with the option to deliver, and also has and IRA option.
http://www.bulliondirect.com/IRA/overview.do

HB Reader wrote: It's too bad you can't buy at least some coins or small bars -- that is far and away the safest and most meaningful way to own the metal. 

Why not try to buy just a couple of coins?  Even if it's only 5-10% of your PP, it will give you a lot of additional security (5-10% is more than most people have to begin with).

Adam1226 wrote: Why can't you hold physicial gold?  (Not asking to try to pressure you to buy physical gold, but just trying to figure out what your limitations are, so that I can make a relevant rec.).

The main reason that I can't hold physical gold is that I have a high net worth.  It seems impractical, difficult and perhaps worrisome to store a large amount of the physical thing. 

Additionally, I am fully invested in GLD.  I would have to take capital gains to undo my position.  Not sure I want to do that---maybe I'd sleep better if I cut back my position and transferred it to something else.  But perhaps going forward, if I were to commit more funds to the PP, I would want to diversify into other gold investments. 

BTW, thanks so much for your thoughts on the subject and for everyone else who has responded.  Very helpful to be able to have this type of dialogue.

scotomatic wrote: The main reason that I can't hold physical gold is that I have a high net worth.  It seems impractical, difficult and perhaps worrisome to store a large amount of the physical thing. 

I don't know (and don't want to know) how high of a net worth we're talking about here, but a single America Eagle monster box holds 500 gold coins (currently worth about $920,000) and comfortably fits in a large (5x10) safe deposit box. If you're willing to store individual 20 coin tubes this site claims you can fit 51 tubes (1020 coins, about $1.8M) in a standard 3x5 box and 180 tubes (3600 coins, about $6.6M) in a 5x10 box (these would be very, very heavy boxes).

Insurance for gold coins in a safe deposit box is available, discussed in this thread.  The insurance fee seems to be about the same as GLD's expense ratio.

I'd be more worried about having gold in a safety deposit box than in an ETF.

Coffee wrote: I'd be more worried about having gold in a safety deposit box than in an ETF.

Why?

Thanks for posting the article, Scotomatic. I'm enjoying it.

Technically, I qualify as a high net worth investor, and I hold some physical gold (coins).
This constitutes 45% of my gold holdings. People who are far, far wealthier hold physical gold.

I also diversify among gold ETFs, holding, IAU, GTU and PHYS.
Why? It just feels right. I don't think it's so dangerous to have a single gold ETF as long as you keep abreast of the news, the prospectus, etc. However, if the pp is all about diversification, and if you plan to eventually have a larger pp than vp, then *why not* mix up the gold?

If you don't want to sell GLD and generate tax bills, you could wait until it's time to rebalance or until you have cash to add to your gold holdings. At that point, you could purchase shares in a different ETF or in coins.

Why am I diversifying among gold ETFs? I'll tell you after one of them has a problem.  ;)

I would hold enough gold to be able to pay for someone to get you out of the country if you had to leave at a moment's notice. The rest could be in ETFs.

Technically, I qualify as a high net worth investor, and I hold some physical gold (coins).
This constitutes 45% of my gold holdings. People who are far, far wealthier hold physical gold.

I also diversify among gold ETFs, holding, IAU, GTU and PHYS.
Why? It just feels right. I don't think it's so dangerous to have a single gold ETF as long as you keep abreast of the news, the prospectus, etc. However, if the pp is all about diversification, and if you plan to eventually have a larger pp than vp, then *why not* mix up the gold?

Dualstow, thanks for the post.  That seems like a practical approach for diversifying gold assets.  Spread some around amongst the gold ETFs (easier to rebalance) to protect against one of them blowing up and hold some physical gold as well.  I think I could work towards accomplishing that mix over time with rebalancing, etc.   

I guess I should probably consider purchasing some physical gold, too.  Maybe it's not as difficult or unwieldy as I thought. 

Where did (do) you purchase your coins?  Do you keep them in a safe deposit box?  Do you insure the safe deposit box?  What do you consider the safest, most cost effective way to purchase gold coins? 

(I will also check into other threads.  I know there are a lot of good posts about where to buy and store physical gold.)  Thanks again for your input.

I bought my coins from AJPM after learning about them from craigr, the creator of this forum. I have mixed feelings about them. The pros are that I received my shipment with no hassle, they were friendly on the phone, and everything was as advertised. The cons are that there seem to be better spreads out there, and the vendors were nothing like the descriptions I read before ordering. (Clumsy with the phone system, could not spell, etc).  Turns out they changed owners shortly before I became a customer. There is at least one member who orders exclusively from them, although he sticks with their web specials for a better price.

Do you keep them in a safe deposit box?  Do you insure the safe deposit box?  What do you consider the safest, most cost effective way to purchase gold coins?

Right now I keep some coins in a strongbox in my home, a few more in my relative's home in a safe, and some others are hidden. If I accumulate more, I will definitely put some in a safe deposit box. I don't plan to insure at this time.
Most cost effective: if you can afford the massive minimum, I guess ordering your whole gold allocation at once from a place like Tulving may be the cheapest. They don't charge much more than spot. I was as nervous as the next guy when I made my first purchase (from AJPM), but now I'm committed to the pp and when I can afford it, I will definitely go that route.

I *like* the idea of dollar-cost-averaging by purchasing a single 1-oz coin every six months or so at a local dealer, but I don't live in the safest of cities. Also, I agree with Craig that it feels good to just get it done, to get it over with. If you can deal with the stress of waiting for that first shipment in the mail, it's not bad.

To each his own, though. Do check out the other threads. As you said, there are many. And there are dozens of members who've been doing this longer than I have.