Even in good economic times I believe that gold is a good investment for perhaps 5-10% of assets as a diversifier and volatility moderator. In bad times I personally feel gold should be a higher per cent of a total portfolio.
Physical gold held in a US bank has been part of my portfolio for a long time, and I have also traded gold stocks and Central Fund of Canada, CEF. During the past year I have looked in depth at a number of publicly-offered personal gold storage plans in the US and elsewhere. None really measured up in my view. Some were little more than secured financing of a dealer's inventory or unallocated portions of a common gold holding. Individual accounts at most major world gold storage vaults require creating a foreign trust and investing in 400 troy ounce bar increments. One plan, Bullion Vault, has an option for storing US COMEX-approved 100 oz bars in the US, but the account itself is trusteed through a London bank, thus it seemed in my view to have most of the paper work, tax and legal issues of all off-shore trusts, and few of the possible advantages.
Due to a constant stream of newsletter and internet chat claiming that gold and silver ETFs are defective in some way, I had not invested in them. But gold ETFs are rapidly spreading around the globe, so I recently decided to spend a good bit of time investigating them. To look at in depth I chose GLD, SPDR Gold Shares, the largest US gold ETF, now holding over 1100 metric tonnes (>35,000,000 troy ounces). The basics are that gold ETFs give all buyers, regardless of size, the opportunity of owning a share of actual specifically-allocated, numbered, safely-vaulted, and insured gold bars for 0.004% total expense per year. Some ETFs charge even marginally less. Check out the competition's prices for buying and storing gold for you if you can find them. In some cases annual costs can run several percent or more of total account value. Since the ETFs are now so large and dominate the market, every expense of a large ETF is incurred at very competitive low cost.
Still there has been a "conspiracy crowd" persistently damning gold ETFs as potentially dangerous frauds. They often say the gold isn't there where the legal prospectus requires it to be. Or they say the gold holding isn't audited, which it is GLD's case. Or that the gold isn't a specifically allocated quantity with uniquely numbered and named (by smelter/fabricator) gold bars which may NOT be borrowed or used by anyone else or mixed with anyone else's gold in the secure vaults in London in the case of GLD. The gold is there, and you can see the list compiled every Friday, after the market closes, of all the allocated numbered gold bars with the weight and number of each bar owned by GLD and the total weight of all bars combined.
Since gold is such a concentrated form of wealth--a 400 troy ounce bar (27.38 US pounds) is valued at $420,000 at $1050 per tr oz--world class gold storage has to be the most secure warehousing operation there is, apart, perhaps, from some military storages. It is a highly specialized type of warehousing with a very long history in London, Zurich, and New York and several Canadian locations. London and Zurich gold warehouses (vaults) have had for centuries the legal structure and legal precedent for specifically handling gold ownership safely and legally under all civil and political conditions.
In addition to SPDR Gold Shares' weekly list of all gold bars they have a daily list page devoted to all the specifics that day of their gold holdings, the number of shares outstanding, and the closing price of gold in London. You can do the math yourself to prove that every ounce of gold is reflected in the share price with virtually never a premium or discount, as is quite common and disturbing for CEF. Then you can compare it with the numbers from the vault on the Friday list above. These facts are readily available to the public, and the legal prospectus for GLD is quiet clear on the structure and operation of the fund. The gold ETF critics are simply wrong in my opinion.
If you are considering investing in gold, you may not want it all in one basket. I have gold in a US bank vault, some in CEF shares, the Central Fund of Canada (not an ETF), and I finally bought an initial GLD position this week after long study of all the evidence and criticism including the prospectus and all SEC filings. I have no personal connection to the gold industry except as a personal private investor, and this not a recommendation, just my own investigation and decision.
Besides GLD and CEF (not an ETF), there are also two other gold ETFs I know of available for sale on US exchanges: IAF and SGOL. I have not done the research on them that I have done on GLD, but they appear to be similar in structure and practice to GLD.
Tom,
Two items:
1) I would appreciate your outlook on where we are in the 2CS as compared to market peaking action?
2) Attached is an excellent link discussing gold investment options. This is the same site I referenced earlier on your blog, i.e. the one dedicated to Harry Browne's permanent portfolio strategy.
http://crawlingroad.com/blog/2009/10/13/permanent-portfolio-25-gold-allocation-faq/
For what it's worth I still remain fairly convinced that one should adopt Harry Browne's permanent portfolio with the majority of their assets and use a small portion to dedicate to a variable portfolio for the likes of Hussman, PIMCO, etc...
For those interested, in addition the the crawlingroad.com website referenced above, the following is a link to the boglehead website which discusses the merits of HB's permanent portfolio.
http://www.bogleheads.org/forum/viewtopic.php?t=15434&mrr=1255794237
Posted by: Heath Rux | October 17, 2009 at 02:58 PM
Tom,
Morningstar has a new free newsletter on alternative investments and hedge like mutual funds. Thought you may be interested.
http://advisor.morningstar.com/Uploaded/PDF/AIO_QuarterlyQ3_NonACC-F.pdf
Posted by: Heath Rux | October 17, 2009 at 03:19 PM
Tom,
Talking to true goldbugs is like talking to religious or otherwise fanatics - it's like talking to the wall. It's true that some newsletter & goldbug sci-fi sellers exploit them by feeding their fears like catholic preachers preyed on fears of "purgatory" to extract moneys from the people for the Vatican's lavish buildings and life-style in the 16th century. The difference is that we claim to be in the age of enlightenment. So much for that. Well, today -if people choose so- they can get information and a second opinion other than their 16th century predecessors. But many choose rather to stick to their own beliefs and if that collides with reality they invent their own version of it through conspiracy theories. That's how true jihadis work too. This is a perfect recipe for trading / investing disaster. They get fleeced for sure.
Joe
Posted by: Joe | October 17, 2009 at 03:48 PM
HR,
2CS is 81.90 as of Friday afternoon. So a few more days of bullish exuberance would put it into an area of high probability for reversal. My approach is to watch for evidence of reversal AFTER 2CS is in the 70's. I can't give you a price and a time of day when it will happen. There is a futures gap up to 1103 and the 50% retracement of futures is about 1120-1125 as I have posted before. Traders may choose those points for major selling. Or they may not.
I have nothing at all against the Harry Browne approach as I have mentioned several times before. He was an early mentor for me in the 1970's. His ideas about diversification and portfolio allocation as much more important than predictions were a major influence on me then and now. His ideas were considered radical then. There are a lot of ways to put his ideas into practice today that were unavailable to retail investors in the 1970's, and that's what I do. If his original formula is comfortable for you and saves you time you could spend better doing other things, go for it. I'm a believer.
Tom
Posted by: Tom Drake | October 17, 2009 at 04:05 PM
Joe,
I've been listening to and reading these gold conspiracy people for over a decade, and they are getting worse. I think the public and a lot of large scale gold investors have caught on to the fact they don't need to buy huge quantities of gold coins or bars and then figure out where and how to safely store and insure them at a reasonable cost.
Investors have cut the legs off the hucksters and hype peddlers by using ETFs for everything these days at generally very low cost. The gold hucksters thought they would make a fortune on the bull market by selling their wares, but apparently they have not and are very angry.
I still think everyone should have **some** gold and/or silver they can get to easily, but the ETFs are liquid, safe, and honest in my opinion for holding larger quantities or for hedging.
If you are worth over ten million dollars, get your own allocated gold account in London or Zurich, even though it will cost you a lot more than when GLD does the exact same thing. Be sure to report the overseas account to the IRS on your annual tax return.
Tom
Posted by: Tom Drake | October 17, 2009 at 04:41 PM
I really like this Harry Browne quote:
“The best kept secret in the investing world: Almost nothing turns out as expected.”
You could say that about life in general. Consistent principles and a lot of luck make the difference between success and failure. Learn to make your own luck by being observant and being willing to change when events change.
Posted by: Tom Drake | October 17, 2009 at 05:03 PM
Tom.
Well said. I am indeed enamored with all the new hedge like funds out there. Would appreciate your take on the M* newsletter. Thanks
Posted by: Heath Rux | October 17, 2009 at 08:35 PM
HR,
I've never been a fan of tying up money in a hedge fund with no regulation.
The managed ETF fund hedge-look-a-likes may be no better although I own LSC.
Harry Browne at least has a track record.
Posted by: Tom Drake | October 17, 2009 at 09:21 PM
Several articles from Saturday's Barron's on gold and the dollar.
http://online.barrons.com/article/SB125573785230491193.html?mod=BOL_hps_mag
http://www.smartmoney.com/investing/economy/the-dollar-s-fall-deal-with-it/
Posted by: Tom Drake | October 19, 2009 at 01:42 AM