Saturday, November 20, 2010

Gold ETFs

I meant to mention this after my post the other day about GLD and SLV in my IRA. For the record, I don't recommend buying paper silver or gold with investment money. You're better off investing in mining companies or even a mining company fund (GDX, for instance), or buying physical gold and silver from your local precious metals dealer. However, in an IRA or 401(k), where your money is essentially being held hostage in exchange for some dubious tax benefits, holding precious metals ETFs can be a method of inflation-proofing and diversifying your portfolio.

So, two questions arise: which precious metals and which funds?

As for which metals, I prefer gold and silver for a couple of reasons. First of all, historically, these two metals have been used as currency for almost the entire history of the human race. As a result, virtually everyone knows that gold and silver are valuable. Platinum has a much more limited market and frankly hasn't kept up with inflation over the last few years. I held physical platinum for several years; bought at prices between $800-$1300 and sold it at close to its peak price $2100. Six months later, the price had collapsed back to $800 and it's been struggling back up since then. Its price is far more volatile than gold or silver, in my experience. In addition, if you need to use it in some sort of emergency, good luck trying to convince someone that it's not silver. Most people have only a vague idea what platinum is and what its worth is; they will look at a platinum coin and think it just looks like really shiny silver; trying to convince them it's worth more than 60 times the same size silver coin may be a challenge. The other precious metals (like palladium or rhodium) have the same problem.

Semi-precious metals like copper, on the other hand, are simply difficult to store -- $1500 in gold will fit in my coin pocket. $1500 in silver will fit in a duffle bag. $1500 in copper will take a forklift to carry.

In my opinion, a balance of some sort between silver and gold seems to be the best bet. So, how to invest in paper gold? There are lots of gold-investment vehicles out there, but if you're looking for a simple method to put investment money into gold, a standard gold ETF is a good place to start. That said, there are other, perhaps better (albeit riskier) ways to invest in paper gold, but I'm just covering the basics in this post.

Gold ETFs
These are designed to track the price of gold by backing the shares with physical bullion. The price of gold futures on the market is $1354.10 per ounce. 

The physical bullion backing the GLD ETF.

GLD. One share of SPDR Gold Trust is backed by one tenth of an ounce of gold, which is held in a vault in London. The custodian is a British company, HSBC Holdings plc. The current share price is $132.20. The expense ratio of the ETF is 0.4%. The trust holds over 41 million ounces of gold.

SGOL. One share of ETFS Physical Swiss Gold is backed by one tenth of an ounce of gold, which is held in vaults in Zurich. The custodian is JPMorgan Chase Bank. Current share price is $134.65. The expense ratio of the fund is 0.39%. The trust holds over 304 thousand ounces of gold.

IAU. One share of IShares Gold Trust is backed by one hundredth of an ounce of gold, which is held in vaults in Toronto, New York, and London. The custodian is BlackRock Asset Management International. Current share price is $13.23. The expense ratio of the fund is 0.25%. The trust holds over 3.4 million ounces of gold.

I'm pretty well settled on the IShares ETF. The expense ratio is a lot lower, which means less physical gold is liquidated to pay for the management of the fund. While IAU doesn't hold as much physical bullion as GLD, it holds more than 10 times as much as SGOL. IAU also spreads its gold among three locations. Finally, since the cost per share is so much lower, it makes it a more accessible investment; I have $124 sitting in my brokerage account at the moment, because it wasn't enough to purchase a share of GLD. So, I'm kicking myself for not going with IAU on my last trade...

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