Gyroscopic Investing

Historically there has been about a 2% to 3% spread on gold bullion. That equaled up to 6% lost on any trade that you buy at 3% above spot, and sold at 3% below spot. In recent years, that spread has jumped to 5% to 6%.

I understand the benefits of holding physical gold coins as compared to ETFs. I'm starting to question whether the costs make the benefits worthwhile, or if using most of your gold allocation as ETFs doesn't make more sense considering the very high costs associated with physical gold ownership today.

Certainly at some point, the spread will be so high that it makes no sense to buy gold coins, and then it will hit equilibrium as more people just decide to use ETFs.

Thoughts?

TripleB,

It's a 1-time cost as opposed to a yearly fee, and if you're in the acquisition phase and sell your etf's at rebalance, it's likely every coin you buy will eventually become your kids' someday.

If you are truly talking about a "permanent" portfolio, you are just incurring these costs once for much of your gold holdings.

I wouldn't let the premium hold you back at all.

If you've never owned gold bullion, it takes a little getting used to.

MediumTex wrote: If you are truly talking about a "permanent" portfolio, you are just incurring these costs once for much of your gold holdings.

I wouldn't let the premium hold you back at all.

If you've never owned gold bullion, it takes a little getting used to.

I owned gold bullion at $600 an ounce. I had to sell it to pay for grad school. It's not quite a one-time cost, because the cost is incurred when you sell it. I plan to die with $0 in assets or as close to $0 as possible. If I die with more than $0 it means that I worked too long and retired too late.

I've never owned physical, forgive the dumb question.

http://en.wikipedia.org/wiki/American_Gold_Eagle
It says the coin consists of 91.67% Au 3% Ag 5.33% Cu

So is the premium ~5-6% over the gold spot market (presumably the value reported at a site like kitco.com),
over the value of 0.9167 oz of gold? 
Or over 1.0000 oz of gold, despite the fact the coin only has 0.9167 oz gold

Also, out of VP curiosity, do silver coins have the same ~5-6% premium over the spot price?

from a qualitative perspective, there is hard-to-measure value of holding some portion of your wealth as a physical asset like some 1 oz American Eagle gold coins, an asset that has held its value for thousands of years, & does not rely on the paper promise of a human institution.

ETF Securities (SGOL) or Central Gold Trust (GTU), even if they have a great track record, has some chance of breaking their paper promise, just as the US Treasury (even if very small or self-inflected) or IBM or Vanguard or the FDIC insurance on your bank, etc.

--

if we leave out the hard-to-value benefit of owning some physical, we can do a quantitative rough calculation of the "break-even" of where holding a gold buillion coin is cheaper than then holding paper gold, assuming no bid ask spread of buying or selling the SGOL ETF.

(1+r) ^ y = (1 + 2p)
r = expense ratio
y = yrs
p = the premium

solving equation for y:
y = (log (1 + 2p)) / (log (1 + r))

Using the ETF SGOL, r = .0039 = 39 basis pts
using TripleB's experience, let's assume that you pay the same premium when buying & selling the coin, & it can very from p = .02 to .06

Low end of premium = .02
=> y ~10.1
Interpretation: If you hold the coin for 10.1 or more yrs, it's cheaper to hold the coin than to hold the SGOL ETF

High end of premium = .06
=> y ~29.1
Interpretation: If you hold the coin for 29.1 or more yrs, it's cheaper to hold the coin than to hold the SGOL ETF

TripleB wrote:

MediumTex wrote: If you are truly talking about a "permanent" portfolio, you are just incurring these costs once for much of your gold holdings.

I wouldn't let the premium hold you back at all.

If you've never owned gold bullion, it takes a little getting used to.

I owned gold bullion at $600 an ounce. I had to sell it to pay for grad school. It's not quite a one-time cost, because the cost is incurred when you sell it. I plan to die with $0 in assets or as close to $0 as possible. If I die with more than $0 it means that I worked too long and retired too late.

If you buy a coin when you are 34 and pay a 3% premium and then when you are 89 you sell it and lose 3% so you can take your new girlfriend on a trip to Tahiti, you're WAY ahead of where you would be after having paid .25% a year for 55 years (plus a small tax amount each year from the income the gold ETF throws off) to own a gold ETF.

And you can still die penniless.

IMHO, it's best to own bullion and a gold ETF.  The right answer is probably a little different for each person.

cabronjames wrote: I've never owned physical, forgive the dumb question.

http://en.wikipedia.org/wiki/American_Gold_Eagle
It says the coin consists of 91.67% Au 3% Ag 5.33% Cu

So is the premium ~5-6% over the gold spot market (presumably the value reported at a site like kitco.com),
over the value of 0.9167 oz of gold? 

No, a 1 oz gold coin always contains exactly 1 oz gold.  An alloy coin such as an Eagle contains 1 oz gold, plus some other stuff, and so weighs slightly more than 1 oz.

AJPM's gold page shows this clearly if you pay attention to the gram weights and karat purity ratings:
http://ajpm.com/gold-bullion.html

Pure gold is a relatively soft metal so there's a possibility that pure coins may become scratched or dented.  Alloyed gold is much harder and practically impossible to damage through normal handling.  AJPM's FAQ explains this rather colorfully.

TripleB wrote:Historically there has been about a 2% to 3% spread on gold bullion. That equaled up to 6% lost on any trade that you buy at 3% above spot, and sold at 3% below spot. In recent years, that spread has jumped to 5% to 6%.

Certainly at some point, the spread will be so high that it makes no sense to buy gold coins, and then it will hit equilibrium as more people just decide to use ETFs.

I don't know where you are getting your data. At the instant I am typing this, at Apmex.com, I can buy a GAE for $1,859.09 or sell them GAE for $1789.10.  That is a 3.9% (total) spread - much less than the +3% / -3% or the 5-6% above and below you mention.

I personally think that something like

7.5% GLD
7.5% IAU
10% Physical Bullion

makes a lot of sense.

ETFs are great because they are so darn liquid and easy to put in a tax deferred acount. If you maintain this gold allocation and gold continues to rise, you sell off your ETFs first. This means that you will only really have to sell your physical coins if gold significantly outperforms for a significant period of time and you have burned through selling all of your ETF gold.

I think MT has talked about having your physical coins be the "core" of your gold allocation. You can trade the ETFs around this core position very cheaply. But it is still nice to have the bullion.

melveyr wrote: I personally think that something like

7.5% GLD
7.5% IAU
10% Physical Bullion

makes a lot of sense.

That's funny because that's exactly what I have been thinking for a when I went all in to the PP almost 2 years ago, I didn't like the idea of putting to much into one ETF, so I split 50% into GLD and 50% into IAU. The theory being that the transaction cost for using 2 ETFs was only slightly more, but provides better risk management in case one defaults or has temporary liquidity problems.  I'm 100% tax-sheltered accounts now, so I can't save anything in gold bullion without doing a Roth IRA contribution withdrawal, which would be stupid. I'll have non-sheltered assets in a few years, and will put all if it towards gold.

If you think about it, and I'll start a new post on the main subboard, it's reasonable to get 100% of your money in tax-sheltered accounts, if you earn under $100k a year. HSA, 401k, IRA, a modest annuity, I-Bonds/EE-Bonds, and you're not paying taxes on anything.

I know how you feel, TripleB. See also this thread from May.
http://gyroscopicinvesting.com/forum/ht ... ic.php?t=0

TripleB wrote: Historically there has been about a 2% to 3% spread on gold bullion. That equaled up to 6% lost on any trade that you buy at 3% above spot, and sold at 3% below spot. In recent years, that spread has jumped to 5% to 6%.

If you're buying and selling 3% above and below spot on gold transactions, you're getting reamed.  Shop around and you can get much better deals than that.  My dealer has a buy /sell differential of 1.1% on Krugerrands, Gold Buffalos, or Gold Maples. 

As a starting place for the best deals check out Goldshark.com or Goldprice.com.