Physical vs ETF

[nwagers]

I'm about to start a PP and in the process of learning the actual implementation details to avoid any expensive mistakes.

My first questions are about gold. Has anyone done backtesting about how the ETFs track with the spot price of gold? I'm curious how the increased liquidity affects the price.

Second, all of the performance data I've found so far doesn't sound like it accounts for any estimates of the cost of owning physical gold. Figuring the performance of an ETF isn't so hard with the published expense ratio. But physical gold has a Buy/Sell spread (let's say 4%) and ongoing storage and insurance costs (maybe 1%?).  Does anyone have data they can go back and calculate the internal rate of return accounting for these costs? The spread cost is impacted by the number of turns. Can someone tell me how many turns/year a PP would have experienced with 35/15 band rebalancing?

I want to make sure I understand the balance between performance and risk in this case. If anyone cares to fill me in, how does this balance change with varying portfolio sizes. The concerns must be different for (gold amounts of) $1k, $10k, $100k, etc.

Thanks

[notsheigetz]

I can't speak to any of your specific questions about performance but I can tell you when I started with the PP I had never bought physical gold before and didn't think much of the idea. I stuck with ETF's for a couple of years and then decided it wouldn't hurt to buy a few coins and tuck them away.

Well, I've bought quite a few more and I can tell you that inasmuch as the PP is about buying peace of mind, physical gold buys you a lot more than an ETF does.

[rickb]

I'm about to start a PP and in the process of learning the actual implementation details to avoid any expensive mistakes.

My first questions are about gold. Has anyone done backtesting about how the ETFs track with the spot price of gold? I'm curious how the increased liquidity affects the price.

Second, all of the performance data I've found so far doesn't sound like it accounts for any estimates of the cost of owning physical gold. Figuring the performance of an ETF isn't so hard with the published expense ratio. But physical gold has a Buy/Sell spread (let's say 4%) and ongoing storage and insurance costs (maybe 1%?).  Does anyone have data they can go back and calculate the internal rate of return accounting for these costs? The spread cost is impacted by the number of turns. Can someone tell me how many turns/year a PP would have experienced with 35/15 band rebalancing?

I want to make sure I understand the balance between performance and risk in this case. If anyone cares to fill me in, how does this balance change with varying portfolio sizes. The concerns must be different for (gold amounts of) $1k, $10k, $100k, etc.

Thanks

There's a world of difference between physical gold you own vs. shares of an ETF.  You seem to be narrowly focused on expense differences, but from a risk perspective owning physical gold eliminates an entire class of risk that exists with any "paper" form of gold ownership.  If there's anything failures such as MF Global should have taught us, it's that problems up to and including outright fraud can and do exist in the financial markets.

Nearly all performance data is "frictionless" and in gold's case is generally based on the spot price.  The ETFs fairly closely track spot (since the authorized participants can make money if the price diverges from spot in either direction), except for the ever diminishing value due to their expense ratios.  The cheapest is currently IAU at 0.25%, so every 10 years you'll lose 2.5% of your gold.

The buy/sell spread for physical gold is about 4%.  Storage in a safe deposit box may be free (depending on your bank).  Insurance can be purchased through a specialty numismatic insurance company, Hugh Wood, for about 0.31% per year (see http://gyroscopicinvesting.com/forum/go ... your-gold/).  So, you lose 4% up front and (if you choose to insure) then another 3.1% every ten years.

With 15/35 bands rebalancing events occur on average about once every 18 months.  In the worst case (one asset reaches 35% while the other 3 reach 15%) this involves selling slightly more than 32% of one asset, although typical rebalancing events involve selling much less (15-20% is more typical).  Assuming gold alternates between outperforming and lagging (another worst case, also extremely unlikely), then you're buying and selling 20% of your total gold holdings every 18 months.

One consideration you haven't mentioned is taxes.  Capital gains from both physical gold and ETFs are subject to collectibles tax rates, currently 28% or your ordinary income rate (whichever is less).  The closed end gold funds (e.g. GTU and PHYS) can be treated as passive foreign investment corporations, allowing capital gains to be taxed at long term capital gains rates (currently as high as 20% depending on your income).  The closed end funds don't always track spot very closely in the short term, but over long periods of time (decades) will generally reflect gold's price difference.  These are structurally much simpler than ETFs (far fewer moving parts), so are at least somewhat less risky as well.

Perth Mint, GoldMoney.com, and BuillionVault.com are other alternatives worth looking into as well.

[Libertarian666]

You might also want to check out "Global Gold", mentioned in the PP book written by the founders of this forum. They have buy/sell spreads of about 4% (for 100g bars) and costs in the neighborhood of 0.5%/year, depending on account size.

They buy physical gold for you and store it in ViaMat vaults. They're not a financial institution, but they are regulated by a Swiss regulatory body for "para-financials".

[Larshus]

I've been through the Refco, and the Man Financial debacles on the futures side. Nothing like seeing the president of the company before a congressional hearing saying hes not responsible/doesn't know what happened when you know DAMN WELL that he stole cash out of your segregated account. Its infuriating. then he gets off scott free because of his political connections and years later you still don't have your cash. The ETF side hasn't seen the like yet, but its only a matter for time. Trust me, fraud WILL happen. Its happened to me twice. Do your self a favor and for the PP make sure you have physical possession of the gold.

[Kshartle]

Nothing like seeing the president of the company before a congressional hearing saying hes not responsible/doesn't know what happened when you know DAMN WELL that he stole cash out of your segregated account. Its infuriating. then he gets off scott free because of his political connections and years later you still don't have your cash.

When there are rulers there are no rules.

[Libertarian666]

Nothing like seeing the president of the company before a congressional hearing saying hes not responsible/doesn't know what happened when you know DAMN WELL that he stole cash out of your segregated account. Its infuriating. then he gets off scott free because of his political connections and years later you still don't have your cash.

When there are rulers there are no rules.

No, there is one rule in that case: the ruler is always right. Or as Nixon put it, "If the President does it, it isn't illegal."

[rickb]

Larshus - what's your opinion about GTU?  Or PHYS?  I assume you know GTU is run by the same folks who run CEF, which has a 40+ year track record of doing pretty much exactly what they say they do (buy gold and silver, put it in a vault, buy more when the premium gets outrageous).  The Spicers (CEF/GTU - there's a silver-only version if you're into that) seem like pretty stand up guys.  Not so sure about Sprott (PHYS).

[vnatale]

I've been through the Refco, and the Man Financial debacles on the futures side. Nothing like seeing the president of the company before a congressional hearing saying hes not responsible/doesn't know what happened when you know DAMN WELL that he stole cash out of your segregated account. Its infuriating. then he gets off scott free because of his political connections and years later you still don't have your cash. The ETF side hasn't seen the like yet, but its only a matter for time. Trust me, fraud WILL happen. Its happened to me twice. Do your self a favor and for the PP make sure you have physical possession of the gold.

In the 6+ years since the above was written is anyone aware of this happening on the EFT side?

Vinny