Tuesday, September 29, 2009

How to Invest in Gold: Physical Gold vs ETFs, Miners

Talk about gold is everywhere. Every financial news TV channel, every newspaper,it seems that every blog, talks about owning gold. That is usually a bad sign for the short term. Nevertheless, this article takes a look at different ways of owning gold, from paper ETFs, to physical gold, and miners.

Physical possession of actual gold (coins, bars) is the best protection against confiscation. This means your own physical ownership, hidden under the matters, or buried in your backyard, or in a safe in a bank. In a bank it can still be confiscated though, as it happened in the 1930s.


Banks and dealers sell them. ScotiaBank is a popular bank, but I know you an get them at RBC, and likely any other Canadian bank.


There are many dealers around the world. In Canada Scotia Bank has just launched (today) a new online service. ScotiaMocatta is their precious metals dealer, one of the largest in the world. You can buy up to $6k online and the coins are delivered to your door. Site.

Canadian Maple Leafs

Canadian coins are produced by the Canadian Mint, they are the Maple Leafs. You can buy gold, silver, and platinum/palladium coins. First minted in 1979, the Canadian Maple Leaf is a pure .9999 (24 Karat) gold coin with no additional alloys added due to a special minting process by the Royal Canadian Mint. They come in various sizes:

-1 Troy Ounce
-1/2 Troy Ounce
-1/4 Troy Ounce
-1/10 Troy Ounce
-1/20 Troy Ounce

Some collector coins even have coins with a $1M face value.

You can view some current prices here (currently around $1030.00 for 1 ounce, add around 3% commission).

American Gold Eagle coins.

You can see prices from dealers here. (I have not use these servcies).


These are South African coins. View prices.

Australian Gold Nugget

The Perth Mint in Australia makes and sells the Australian Gold Nugget can also buy collector coins with kangaroos and koalas depicted in the them.

Perth Mint bars come with a serial number, the weight, the purity and the Perth Mint stamp. From the Perth Mint you can buy allocated and unallocated gold. The former being an allocated bar(s) for which you pay a storage cost and the latter is part of the mints guaranteed inventory for which you pay no holding costs. You can also buy a Call Warrant on the ASX (ASX:ZAUWBA) which "entitles you to acquire one hundredth of a troy ounce of fine gold on or before the Expiry Date of 31 December 2013 and may be exercised by you at any time before the Expiry Date."


Banks sell them, for example, Scotiabank. These are certificates for possession of gold that you can keep your self or in a safe. They are meant to be interchangeable with physical gold. They have obvious advantages over physical gold in terms of safety, but the actual thing is not in your possession. Please see this comment about someone who had silver cetificates for many years, paid storage fees al these years, went to the bank to get his silver, and was told there was none.


A Swiss version which allows you to own allocated gold in a professional bullion vault with daily 3rd party audits. Another expert says that you cannot take delivery of your bullion at Bullionvault unless there is a "special" circumstance like.


There are many ETFs that track the price of gold.


The Spiders Gold Shares is the biggest and best known ETF. It says it currently owns 1,094 tons of gold. It has always been subject to many conspiracy theories and suspicions. Many believe it is not really backed by physical gold, they do not have or share physical bar numbers. In the event of financial difficulties, each shareholder appears to be an unsecured creditor.

GLD appears to own real gold bars in a real vault but they belong to the ETF Trust, not to shareholders, who are creditors. The management fee for owning GLD shares is 0.4% per year. A gold expert says that a "real" bar list would list every serial number of each bar. Instead GLD just list the bars #1, #2, #3, #4 ... etc.

IAU, and IGT:

iShares COMEX Gold Trust is a trust whose purpose is to own gold transferred to the Trust in exchange for shares issued by the Trust. The objective of the Trust is for the value of its shares to reflect, at any given time, the price of gold owned by the Trust at that time, less the Trust’s expenses and liabilities. IAU trades in the U.S, IGT in Canada.


This Canadian ETF seems solid and backed by physical gold and silver. The Company invests virtually all of its assets in long-term holdings of unencumbered, allocated and segregated gold and silver bullion. The Company holds at least 90% of its net assets in gold and silver bullion, primarily in bar form. The Central Fund of Canada says that its bullion holdings and bank vault security are inspected twice annually by directors and/or officers of Central Fund. "On every occasion, inspections are required to be performed in the presence of both Central Fund's external auditors and bank personnel".

Although CEF can be bought on the AMEX (symbol CEF), it is ultimately a Canadian-dollar based stock. Investors in the U.S. should take into consuideration the exchange rate between the U.S. Dollar and the Canadian dollar. This could actually work in your favor, if the U.S. dollar collapses further.


Another Canadian ETF. Gold is stored in segregated safekeeping in the treasury vaults of the Canadian Imperial Bank of Commerce. Auditors perform an annual physical bullion inspection. It can be bought on the Amex (symbol GTU). Exchange rate considerations apply.

This chart shows the performance of GTU vs GTU.UN year-to-date. It clearly shows the implications of using different currencies. In the end, however, if a U.S.-based investor had bought in Canadian dollar, the GTU.UN version would be 10-12% higher since the US dollar lost the same amount.


Deutsche Bank has 4 gold ETNs:

- DB Gold (NYSE: DGL) (gold ETF)
- DB Gold Double Long (NYSE: DGP) (long leveraged gold ETN)
- DB Gold Short (NYSE: DGZ) (short gold ETN)
- DB Gold Double Short (NYSE: DZZ) (short leveraged gold ETN)

Other ETFs and ETNs:



This chart compares both ETFs on YTD basis. Remember that CEF also has silver, and silver has had a stellar year.



This is a 2X gold bullion ETF, a leveraged Canadian ETF not backed by physical gold. For day traders or gamblers, or if you believe gold will rise without volatility.



Producing miners are a great way to obtain leveraged exposure to gold. Look for companies that have no debt issues. There are many, my favorites: Goldcorp, Kinross, Yamana. I'd stay away from Barrick. In silver, Silver Wheaton has a great royalty model.


Exploring companies are lottery tickets. The conservative investor should stay away from them. However, juniors that are already producing and have no debt are potentially good.


GDX is the Miner ETF in the U.S. XGD.to is the Canadian version. They correspond to baskets of companies.

GLD vs GDX chart:

Finally, we compare GLD with HBU.UN. GLD is in U.S Dollars, HBU is Canadian and leveraged 2X:

An American investor who had bought HBU at the beginning of the year would add another 10% or so on top.


Some notes from others that I found useful:

"Cost/ premium: GLD tracks spot price closely. CEF and GTU trade at some premiums to net asset value. Bullion Vault also sound like they have low transaction costs. Perth Mint charges 3.8% for a kilo bar and 9.1% for a 1 oz coin. Allocated storage fees can run 3%. Your local coin dealers premium is usually negotiable- currently 5-10% Storage/liquidity: All storage methods have risks. GLD, CEF or GTU can be sold with a mouse click. Perth Mint gold can be sold at any time with a choice of redeemable currencies. Coins in your lock box at the bank can be viewed by government authorities without a warrant or your knowledge at any time. Gold in the home is subject to possible loss due to crime, fire or lost if you forget where you stored it. Selling your physical gold may be difficult due to the vagaries of a crisis environment which would dictate the need to liquidate gold or coin dealers. Tax consequences: The ETF's probably have less tax liability at the moment however rules are likely to change in the future. Physical gold could be bartered or sold in small amounts in behind the door transactions. In a severe crisis, energy and ammo may be more valuable than gold, but gold should be exchangeable for the things you need to survive".

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Gold said...
This comment has been removed by a blog administrator.
The Shocked Investor said...

(Gold) said...
I really need that kind of article because i want to invest in the gold and that article is very best to get the information about the investment in the gold. So thanks for sharing with me.

Krishna said...

What is Gold ETF?

The Shocked Investor said...

Krishna, link to GLD Exchange Traded Fund: http://www.spdrgoldshares.com/

1,095 tons today.

You can buy them as regular shares. Critics and conspiracists say they don't have any real gold.

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