Owning Physical Gold Or An ETF/Closed End Fund?

By: ispeculatornew
Date posted: 04.23.2013 (3:00 am) | Write a Comment  (0 Comments)

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gold_bullionI’ve said for some time that I think most investors should own part of their assets in gold. It’s an asset that has done well over long periods of time, especially as a hedge against inflation and weak/volatile economies. There is certainly a sense that this could be a good time to buy following major losses in the last few weeks. I would never describe myself as a gold bug and I’m not one who follows the daily movements of gold. Like others such as John Mauldin, I believe in buying some gold, especially after big declines and holding on to it. I’ll probably never have 5% of my assets in gold, but I do have a small part of my portfolio invested. I received a couple of questions last week regarding different ways to buy gold. There are certainly pros and cons to both methods. Here are my thoughts:

Buying Synthetic Gold

There are many ways to do this (futures, options, etc) but I think it’s fair to say the most popular method is through ETF’s. That is also generally the way I’d personally do it. Some closed end funds also provide good ways to gain exposure and can sometimes even be converted back into physical gold but the problem is that closed end funds can end up trading away from NAV. So you might end up buying at a given price, and selling it at a loss even though the price of gold increased. It’s a tricky thing really. I personally refer going through the route of ETF’s such as GLD in the US and CGL in Canada. There are always conspiracy theories about where the gold is held, etc. I guess those stories always find their way around any type of gold story:)

Top Benefits: The costs are actually very small here. When trading an ETF like GLD, you can generally buy at or near NAV and will only pay a very small commission.

Top Downsides: If you’re holding gold as a hedge for a major financial collapse, I guess it’s worth asking yourself what would happen to your gold ETF if that happened. Perhaps it would be fine, but I know of several people who fear its value would not rise the same way physical gold’s value would in such a scenario. Also, how useful is a gold ETF if the markets are down, etc?

GLD

Buying Physical Gold

In this case,you an buy physical gold usually in coins, from a local dealer or through the internet, etc. They will generally send it over to you and you can then either store it in your home somewhere or rent a safety deposit box to store it.

Top Benefits: Being able to use your gold at any point certainly has value, especially if you are worried that a currency or a bank deposit could end up being worthless overnight.

Top Downsides: The costs. If you’re going to do this, please do one exercise. Ask the place/site/person you’re buying from a simple question. If I buy $10,000 worth of gold now and resell it to you an hour later (assuming gold has not moved), how much will I get? This gives you a good idea of fees involved, etc. Also, needing to hold and store your gold is certainly not ideal and I can’t imagine storing too much of it in my home.

How about you? Do you own gold? If so, how?

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