SGOL ETF For Gold Allocation: What are the risks?

[kc]

I currently have a permanent portfolio that is comprised of the following:

25% VTI (Stock ETF)
25% TLT (Long Term Treasury Bond ETF)
25% SGOL (Gold ETF)
25% Treasury Money Market Fund

While I have not read too many concerns on this discussion forum about utilizing ETFs for stock and bond holdings, there are some who remain uncomfortable with an ETF for gold. 

I have heard numerous discussions about counterparty risk.  However, is anyone aware of any ETF (gold or otherwise) that has actually been closed for being fraudulent or unable to make payments out to its shareholders?  Also, is there a special counterparty risk that is associated with gold ETFs that I am not thinking about? 

I like SGOL, because the holdings are in Zurich, Switzerland, which has historically been a very secure place to keep gold.  Is anyone aware of any downsides to having the ETF store the gold in Zurich, as opposed to London (GLD), or a combination of London, Toronto and New York (IAU)?

[foglifter]

Welcome to the forum!
I assume you probably read some of the FAQs, if not I encourage you to do so because you surely will find many of your future questions answered there.

I think both SGOL and IAU are good options, but IAU has the lowest ER of all gold ETFs. I personally try to stay away from GLD because of some buzz that was going around in the last couple of years regarding their accounting practices. Not saying GLD is risky, but I haven't read anything like that about other ETFs.

Also, closed end funds GTU or PHYS could be an option for taxable account if your tax-deferred space is limited. But be sure to watch the premiums.

P.S. A few days ago I sold my GTU at 10% premium and the same day bought IAU at a discount of about -4%.

[foglifter]

kc,

Here's a good read on gold ETFs and CEFs:

https://web.archive.org/web/20160324133 ... gold-etfs/

[smurff]

ETFs are relatively new products with most of them less than ten years old. That is a long time to us but is too new for all the unforeseen design errors and frauds (and their consequences) to be known.  This is true not only about gold ETFs but also stock ETF funds, option ETF funds, currency ETF funds, country-specific ETF funds, ETNs, 2X 3X XX funds, etc.  Some of the ETF funds are practically equal to mutual funds except for being traded on the stock exchanges, but many of them are totally unfamiliar animals to most investors.  Sometimes ETF products fulfill a need that did not exist before--for example, gold ETF s allow investors to have gold representation in their 401k and IRA accounts. Others allow 401k and IRA accounts to participate on the options and futures markets from the "safety" of the NYSE. 

Right now I don't think there is an imminent danger from gold ETF funds.  Years ago Switzerland was a country that one could rely on for sound money and sound banking practices but globalization has changed their ability to be that beacon in the financial fog. Lately there have been sad reports from there, from the massive trading fraud at UBS, the effective devaluation of their currency (whatever rational reason for doing so), forced revelation of international account holders to USA and German governments, and rumors delays in access to allocated gold stored with them by private citizens. In other words, gold storage in Switzerland is no more safe or sacrosanct that that stored elsewhere.  The ability of other governments to force little Switzerland to go back on their promise of financial privacy, for example, may negate the benefits of storing gold there for political safety via geographic diversification. 

[kc]

foglifter and smurff,

Thanks for the information!

[melveyr]

I think the best gold allocation is something like...

5% GLD
5% IAU
5% SGOL
10% Physical Coins

Who knows which option is the safest? Whenever I don't know an outcome I try to diversify as best I can.

[Tortoise]

Right now I don't think there is an imminent danger from gold ETF funds.  Years ago Switzerland was a country that one could rely on for sound money and sound banking practices but globalization has changed their ability to be that beacon in the financial fog. Lately there have been sad reports from there, from the massive trading fraud at UBS, the effective devaluation of their currency (whatever rational reason for doing so), forced revelation of international account holders to USA and German governments, and rumors delays in access to allocated gold stored with them by private citizens. In other words, gold storage in Switzerland is no more safe or sacrosanct that that stored elsewhere.  The ability of other governments to force little Switzerland to go back on their promise of financial privacy, for example, may negate the benefits of storing gold there for political safety via geographic diversification. 

Does anyone happen to know what motivated the Swiss to abandon their long tradition of banking privacy? It looks like the Swiss and U.S. governments signed an income tax treaty in 1996 and subsequently strengthened it in 2003 and 2009.

What did Switzerland gain by entering such an agreement with the United States? Given the large amount of profit the Swiss banks must have been making on their U.S. clients' private accounts, I'm guessing the U.S. government must have had to use some powerful bargaining chips to convince the Swiss banks to start doing things their way. Any ideas on what those bargaining chips might be?

[smurff]

Most big banks are international and Swiss banks are no exception.  When Swiss banks began acquiring large American banks in the 1990s, their new American divisions were subject to American laws and regulations.  Their American divisions also grew even larger--which meant that if American regulators and financial police said jump through hoops, the bank would jump.  

An American whistleblower came along a couple of years ago, and under threat himself from the IRS, SEC, and other US government entities for his own wrongdoing, he revealed how UBS worked to keep American clients' money hidden abroad, away from the IRS.  Around the same time another banker stole the company's client list and held it hostage, threatening to sell it to Germany and France.  Other banks doing business in Switzerland had client lists stolen by hackers, including HSBC earlier this year (March 2011?), with threats to expose client names to various countries' tax authorities.  

CBS 60 Minutes did a segment about the American whistleblower.  You can probably find it if you search their site, but there is an article, "UBS Whistleblower: Secret Swiss Banking's End," that tells a lot of the story:

http://www.cbsnews.com/stories/2010/08/ ... ncol;lst;5

My guess is that Switzerland could see the writing on the wall.  Their banks work internationally, and the only way to maintain their financial privacy regime would be for their banks to stop doing business abroad--which would mean many would have to divest themselves, in fire sales, of big chunks of their businesses.  Also, Switzerland wants to keep good relations with their surrounding neighbors, all members of the EU.  Which by definition they can't keep if they are outed as actively helping EU citizens evade taxes.   In the end, too much sentiment was for changing the law to meet the needs of globalism.  It's part of the same reason they linked the Swiss Franc to the Euro a few weeks ago:  Their currency was becoming so strong that Swiss-based companies were losing out to other businesses in countries with weaker big currencies (primarily the Euro and US dollar) and hence, cheaper inputs and products.

There's a bit of  "the one with the biggest guns makes the rules" aspect to all of this.  Whose laws do you follow in the event of a conflict?

[Khisanth]

I own only paper gold at this time. I've been pretty comfortable with electronic transactions for most of my life and rarely use cash - (I use Mint.com, electronic transfers, credit cards wherever possible), so I have quite a bit of inertia, but reading this article has gotten me thinking about physical...

http://fofoa.blogspot.com/2009/03/all-p ... on-on.html

Physical premium will pay for itself after ~10 years comparing the 4% to 5% 1-ounce coin premium versus the 0.39% yearly expense ratio for GLD/SGOL. That's not counting any yearly insurance premium I'd want to get for gold coins.

[MachineGhost]

I own only paper gold at this time. I've been pretty comfortable with electronic transactions for most of my life and rarely use cash - (I use Mint.com, electronic transfers, credit cards wherever possible), so I have quite a bit of inertia, but reading this article has gotten me thinking about physical...

http://fofoa.blogspot.com/2009/03/all-p ... on-on.html

Lots of inaccuracies in that so I stopped reading.  But typically, people confuse value with a medium of exchange (money).  Gold is not money or a medium of exchange.  It is just a store of value.  It could as easily been something else.

But, paper gold is a derivative based on an underlying.  Thats fine as long as there is not a crowded trade or liabilities up the wazoo of the trustee, fraudulent accounting, fractional receipt issuance, broker lending out your shares, etc..  Lots of things have to not go wrong.

Probably the best form of paper gold, with the least layers of intermediaries, is the Perth Mint Certificate or Mocatta Delivery Order as that is specific title to a specific claim of assets (if allocated).  Very easy to transport across borders too.

Most of the gold ETF's all use the same banks, same trustees, same vaults, same custodians, same auditors so the difference in systemic risk between them is largely illusionary.

I prefer the allocated gold holdings of a Swiss canton's bank traded as ZGLD on the Swiss Exchange.  I have faith they would make good in a worst case secnario unlike any other institution.

But, Hong Kong is the next best place for storing gold after Switzerland.  They even sell gold in ATMs over there!

Clive pointed out that 15% of the 25% gold allocation never gets touched during rebalancings, so I feel that portion should be in permament physical coins (I also mentioned in another thread semi-numismatic can be a better buy than regular right now).

MG

[foglifter]

Most of the gold ETF's all use the same banks, same trustees, same vaults, same custodians, same auditors so the difference in systemic risk between them is largely illusionary.

Canadian CEFs (CEF, GTU, PHYS) are a bit different. Although there still is a man in the middle, but we can call him a "better man".

But, Hong Kong is the next best place for storing gold after Switzerland.  They even sell gold in ATMs over there!

Let's remember that Hong Kong is now part of China. So there is always a possibility of a "highly unlikely event" when all that gold becomes the property of the Chinese Communist Party.

[craigr]

When you buy a stock/ETF it is held in the street name of the broker, not your name. The idea that you're going to show up in Zurich or Alberta and pick up your gold from the ETF directly is almost pure marketing. The chances that the fund owner is going to know it's you that owns the shares is almost zero. You'd have to work with your broker to get actual stock certificates issued in your name. Then there is the issue about showing up and proving your identity, etc.

Also many people are not aware that any funds that hold money in US dollars have those assets in US banks/brokerages even if based in another country. So those funds are not outside of the US. The gold may be, but that's it!

So while it is nice to think about, I think the reality is much different on these ETFs.

I agree that the ZGLD ETF is probably the "hardiest" of the bunch. But this ETF is not available for purchase by Americans. You could jump through some hoops to get it on a foreign exchange, but this is a bad idea because of potential tax and other issues not being registered here. So even if you can buy it, you should be aware that it is strongly discouraged.

Now, if you are a non-US person in a foreign country then by all means buy ZGLD. It is probably the best of the Gold ETFs out there.

All of these ETFs have similar risks. They almost always use the same vaults, etc. to hold their gold. The Canadian ones are exceptions as they hold it in Canada. But again you get that street name issue again so good luck proving you own it if your brokerage has a problem.

All gold ETFs are compromise products. They are convenient and good for a portion of your gold holdings and easy rebalancing. But if you want to hold gold overseas you're going to need to do something more robust. These overseas storage ETFs may be marginally better than the big guys of StateStreet GLD or iShares IAU, but ETFs are not the answer no matter what the marketing department has to say on the matter.

[BearBones]

Ok, that was good, Craig. Looking forward to this book...

[MachineGhost]

I agree that the ZGLD ETF is probably the "hardiest" of the bunch. But this ETF is not available for purchase by Americans. You could jump through some hoops to get it on a foreign exchange, but this is a bad idea because of potential tax and other issues not being registered here. So even if you can buy it, you should be aware that it is strongly discouraged.

I don't mean to be a hard ass, but this is the second time you've made the claim that ZGLD is not "available" to be purchased by Americans.  As I mentioned in the other thread, it is the U.S. broker's fault if they dont have a business relationship with the Swiss Exchange (not counting buyng it OTC).  I can go to my U.S. broker, punch in the ticker, and readily buy it.  You are almost infering that it is illegal to do so.

What tax and other issues are there?

Who is "strongly discouraging" it other than you?

MG

[SteveGo]

From: http://solari.com/articles/ZKB_Precious_Metals_ETFs/

According to these prospectuses, the ZKB Gold and Silver ETF shares may not be "offered, sold, resold or delivered either directly or indirectly in the United States, to US citizens or persons resident in the United States, or to stock corporations or other legal entities established or organized under the laws of the United States" except in a transaction exempt from US securities laws and such US-domiciled investors may not redeem any shares they hold in exchange for precious metals. This policy was confirmed by a representative of the gold ETF in Switzerland, who was not willing to provide a copy of the prospectus to our US-based attorney due to these limitations.

At least two brokers we talked to in the US told us that purchases of ZKB precious metals ETFs on the Swiss exchange (i.e., in the secondary market) by US domiciled investors are prohibited. At least two other dealers were willing to purchase and hold ZKB ETFs on behalf of our affiliate’s US-domiciled clients. Thus, it appears that a US-domiciled investor may succeed in purchasing ZKB Gold and Silver ETF shares in the secondary market, but he or she will need to rely upon the secondary market for sales and cannot expect to be able to redeem shares for gold or silver.


Here is some info directly from ZKB at:
http://media.fundinfo.com/pdf/2012/02/0 ... -12-30.pdf

The site won't allow cut and paste, so you will have to follow the link, and look at page 2, under "Legal Information."

[craigr]

What tax and other issues are there?

I called one of my contacts in Switzerland last night that is very familiar with this fund and Swiss banking financial products. He also specializes in servicing American clients, is a SEC registered financial advisor, and has been in the private banking business for over 20 years.

He stated, once again, that the ZGLD fund should not be bought by Americans. For one reason it is not registered in the states so it is subject to much higher taxation as a foreign investment company. This leads to a lot of risks for people that buy the fund. Secondly the bank does not want to deal with American clients so you are taking risks of buying a product where the issuer doesn't want your business.

Who is "strongly discouraging" it other than you?

I'm just telling you what I know based on what several people inside the industry have told me. Zurich Canton bank is a great institution, but they don't want to deal with American clients. They probably won't even talk to you if they see you are calling from an American area code on your phone.

And again it's still an ETF. So you still have virtually the same ETF risks such as it being in street name, proving ownership, etc. just like the other ones SGOL or PHYS have. So not only are you still stuck with the ETF problems as others, but you have the additional problem of investing in an unregistered product and a bank that to doesn't want your business!

[Ad Orientem]

...Probably the best form of paper gold, with the least layers of intermediaries, is the Perth Mint Certificate or Mocatta Delivery Order as that is specific title to a specific claim of assets (if allocated).  Very easy to transport across borders too...

...But, Hong Kong is the next best place for storing gold after Switzerland.  They even sell gold in ATMs over there!...

I concur with your opinion of the Perth Mint.  Right now I think that's the best bet for overseas gold. 

Re: Hong Kong I'm a bit more skeptical.  Hong Kong works well at the moment because for the most part they are left alone to do their thing.  But Hong Kong IS NOT an asiatic Switzerland.  It is part of the People's Republic of China.  And the PRC is not a democratic state with a strong history of respect for the rule of law or property rights.  Nor are they a neutral state in foreign affairs.  Point in fact the PRC's foreign policy is, if perhaps not hostile to ours, at least less than friendly.

Is Hong Kong a safe place to do business?  On a near term basis I think so.  Long term I am not so sure.  If your looking for an uber safe place to stash gold I would shy away from anywhere that is run by an authoritarian police state with a history an adversarial relationship with our country.