I’m hoping someone out there has some insight into this. I love gold and silver, and own GLD and SLV. Also, I have some silver bullion at home. Now, I’m really thinking of ramping up my investment in gold and silver, but my gut is telling me to buy the actual bullion. Are there any pros / cons to owning the bullion over the ETFs? Now, let’s tackle some of the common ones: Liquidity. This is not an issue for me. I live in NYC and there are many places I can sell bullion for spot any day of the week. Storage Issues. I don’t mind storing the bullion myself. (It’s not like I have 2,000 pounds of the stuff). Tracking: I know that the ETFs don’t “purely” track the spot prices of bullion for many reasons. Are there any other issues that I’m not thinking about??? Thanks guys.
Sure, you’re missing a few key issues. Gold just entered backwardation (along part of the futures curve) for the first time in god knows how long, and silver has been in backwardation for about a year now. It was the first time in history that’d happened. What that means is there’s huge demand for the physical, and folks are pricing in a supply crunch in the near future. If that pans out, you don’t want to be holding paper. In the interest of balance, futures are also being driven down in price due to some miners hedging their positions, but that’s a much smaller factor. In a nutshell, owning the physcial desirable because there’s no counterparty risk. And, since anyone that would buy the physical has at least a little tinfoil-hat-wearing tendencies, you probably don’t want to be in bed with JPMorgan. Of course, owning the physical isn’t always practical. If you have to buy an ETF, don’t buy SLV and GLD. Go with PSLV or PHYS. The TL;DR version: As long as liquidity and storage aren’t an issue, and you’re going to hold on to it for a while, always go with the physical. For additional exposure you can also look at the miners, but that’s a whole other conversation.
Sweep the Leg Wrote: ------------------------------------------------------- > Sure, you’re missing a few key issues. Gold just > entered backwardation (along part of the futures > curve) for the first time in god knows how long, > and silver has been in backwardation for about a > year now. It was the first time in history that’d > happened. > > What that means is there’s huge demand for the > physical, and folks are pricing in a supply crunch > in the near future. If that pans out, you don’t > want to be holding paper. In the interest of > balance, futures are also being driven down in > price due to some miners hedging their positions, > but that’s a much smaller factor. > > In a nutshell, owning the physcial desirable > because there’s no counterparty risk. And, since > anyone that would buy the physical has at least a > little tinfoil-hat-wearing tendencies, you > probably don’t want to be in bed with JPMorgan. > > Of course, owning the physical isn’t always > practical. If you have to buy an ETF, don’t buy > SLV and GLD. Go with PSLV or PHYS. > > The TL;DR version: As long as liquidity and > storage aren’t an issue, and you’re going to hold > on to it for a while, always go with the > physical. > > For additional exposure you can also look at the > miners, but that’s a whole other conversation. When you own physical you become your own central bank. When you own gold ETF’s you are still exposed to fiat, which defeats the whole purpose of owning gold in the first place.
Actually, I thought that GLD shares need to be backed by gold, so it’s not really fiat. Also, I’m looking at the COMEX gold curve right now, and it’s pretty upwards sloping. Am I missing something?
ohai Wrote: ------------------------------------------------------- > Actually, I thought that GLD shares need to be > backed by gold, so it’s not really fiat. They’re supposed to be, but they’re not. By all accounts it’s not as bad as SLV, but the gold in the GLD vaults is repeatedly loaned out to other banks making it a strecth to say it’d really be there if you needed it. > Also, I’m looking at the COMEX gold curve right > now, and it’s pretty upwards sloping. Am I missing > something? Certainly not pronounced backwardation, and it might already be gone, but here’s Tyler’s take on it: http://www.zerohedge.com/news/perfect-storm-sees-gold-silver-surge-–-chavez-gold-action-leads-backwardation-short-squeeze-and
equity_analyst Wrote: ------------------------------------------------------- > > When you own gold ETF’s you are still exposed to > fiat, ??? > which defeats the whole purpose of owning > gold in the first place. Assuming part 1 is true, part 2 is not necessarily true. My reason for owning gold these days is because of distrusting fiat currencies, but that’s not the only reason people might own gold. Demand for jewelry is another reason. Industrial use is another reason (electronics). Technically, my expectation that others will distrust fiat currencies and run to gold… which does mean I’m speculating on something that is prone to a bubble, but as long as I’m aware of that, and what it means for an exit strategy, I think it can be managed responsibly.
It’s a funny thing. To extreme gold bugs, making 20% in gold is worth more than making 100% in Netflix. Many of them just can’t reconcile the fact that you still need to use paper money to buy food/live. I would disagree, BChad, about how much of a demand driver industrial/jewelry use is for gold though. Gold is in a secular bull market because of a fundamental shift by central banks, particularly in emerging markets, to build/boost their reserves and diversify away from the dollar and other fiat currencies. Industrial/Jewelry use just isn’t driving this trend. Silver is a different story.
STL, I am in gold for the fiat currency argument, and that’s clearly what’s driving these recent moves. So I think we’re basically in agreement. I just thought the earlier statement was a bit sweeping. In more “normal” times, the industrial/jewelry use is a more important consideration than it is now. Completely agree on the fact that the fiat danger is about long term effects… short term, you still have to buy food and pay mortgages with cash and other fiat stuff. Except in hyper-inflationary times, holding some fiat currency for a bit in order to pay for a movie is no great risk (and even then, people still have to do it)
Sweep the Leg Wrote: ------------------------------------------------------- > Sure, you’re missing a few key issues. Gold just > entered backwardation (along part of the futures > curve) for the first time in god knows how long, > and silver has been in backwardation for about a > year now. It was the first time in history that’d > happened. > > What that means is there’s huge demand for the > physical, and folks are pricing in a supply crunch > in the near future. If that pans out, you don’t > want to be holding paper. In the interest of > balance, futures are also being driven down in > price due to some miners hedging their positions, > but that’s a much smaller factor. So this is a basic question: if people are pricing in a supply crunch in the future, wouldn’t gold be in contango instead of backwardation?
Why do things backwardate again? 1) Convenience yield - the risk of not having it on hand when you need it is worth paying more to have it in your possession now/earlier. Anything else? If people want to move consumption of the underlying forward in time, then it will depress the prices further out in the curve. If people become more willing to wait, it will contangify. Any other bits on interpreting contango vs backwardation? Changes in storage costs will make the futures curve steepen or flatten, but I don’t think storage costs can actually turn a forward curve into backwardation (by itself). Some products (agricultural products, heating oil, gasoline) have seasonal demand changes, so the curve will shift over time to reflect these. But one can presumably create a seasonally adjusted forward curve for making investment decisions.
Put simply, why buy a claim on gold in the future if you don’t think you’ll be able to receive it? A lot of textbook contango/backwardation explainations can get thrown out the window with gold especially, and silver to a lesser extent. Weirder forces at work.
A lot of people close out their futures contracts and cash settle them without ever intending to take delivery. I understand that if there is total anarchy, a piece of paper isn’t going to be worth anything, but I don’t think we’re headed that far down the road. As for lending the gold out? My understanding is that gold is a very dense metal, and so what is lent out is a piece of paper saying that section X of my vault is lent to person Y under terms Z. Those terms almost always include the option to call back the gold if needed. So 1) the gold isn’t going anywhere, physically, and 2) there is a call provision if necessary, and 3) people buying GLD care about changes in the price of gold, not holding the gold in their hands. So I see why physical is marginally better, but GLD is pretty liquid most of the time, and that convenience is worth a marginal increase in risk. If the liquidity risk for GLD really does increase, then it may be time to review it.
To be clear, I’m in the PM market to make fiat money. That’s all I care about. I don’t own any physical, nor do I plan on buying any. I’m not an doomsdayer. I disagree that people don’t really take delivery. Google University of Texas and gold and see for yourself. More investors, and more importantly, central banks, are hoarding the physical; hence backwardation. That’s exactly the point, and why people need to look at the market for gold and silver differently. Oil is starting to trade more like a PM, but that’s another topic. I agree about the lending part, the physical gold isn’t actually being moved. Ironically, that’s part of the problem. Because it doesn’t go anywhere, the same gold bar gets “lent” to multiple entities, basically leveraging the physical. This is cumbersome for several reasons, but if the shiat hits the fan, or if there’s a run on the physical it becomes obvious. Sure, GLD is liquid, but this is something you need to consider. (Another thing to consider is John Paulson’s $5.5 Billion stake in GLD. I’m not sure what kind of risk you call it, but if he ever has to sell that off in a hurry it’s going to crush the ETF. Physical gold won’t budge.) So, back to the original point of the thread, if you’re comfortable buying the physical, do it.
The U of Texas decision was newsworthy because it is uncommon. But you’re right that maybe we are seeing a shift in people’s decisions on holding contracts vs physical, and that’s worth considering. Not because physical is inherently better in a non-doomsday scenario, but because people may perceive it to be, or more people will start thinking we are in a doomsday scenario and want the physical. I was not aware that the same gold bar gets lent to more than one borrower simultaneously. That is a problem, and I need to think about how an unraveling of that situation would play out before I can come to a conclusion.
I came across some interesting facts about gold a year or two ago (can’t remember where): 10 years or so ago gold demand was roughly 65% jewellery, 30% fabrication and 5% investment. Now it is something like 60% investment demand, 20% fabrication and 20% jewellery demand (the figures aren’t exact, google it if you want). Gold has tulips written all over it (though we aren’t anywhere near the top - though I just did see on morning TV today some moron spruiking gold as an investment with a $5000 price within 5 years - when morning TV shows start talking about gold you know the masses are not far behind and neither is the top)
newsuper Wrote: ------------------------------------------------------- > Gold has tulips written all over it Except gold has been used as currency for 5000 years.
Sweep the Leg Wrote: ------------------------------------------------------- > newsuper Wrote: > -------------------------------------------------- > ----- > > Gold has tulips written all over it > > Except gold has been used as currency for 5000 > years. True, but beach shells were used as a currency for about 100,000 years and I don’t see anyone rushing to invest in them.
Interesting discussion. Thanks guys.
newsuper Wrote: ------------------------------------------------------- > Sweep the Leg Wrote: > -------------------------------------------------- > ----- > > newsuper Wrote: > > > -------------------------------------------------- > > > ----- > > > Gold has tulips written all over it > > > > Except gold has been used as currency for 5000 > > years. > > > True, but beach shells were used as a currency for > about 100,000 years and I don’t see anyone rushing > to invest in them. Dude! Awesome ETF idea!!!
What will you guys do if gold crashes? Do you imagine it ever crashing, even 10 years from now? Do you expect you’ll be able to sell out just before all the other suckers?