Overseas Gold ETFs and Geographic Diversifcation

[craigr]

This topic came up in another thread, but I wanted to have its own thread on it. Basically there is a lot of talk about an ETF holding gold overseas as being a substitute for better forms of geographic diversification. I doubt it. Highly.

Gold ETFs are not sold based on ultimate safety. They are sold because they are convenient. It shouldn't go any further than this. They are a useful tool and perhaps those with gold in Switzerland and similar locales have a slightly better geographic diversification factor. But I think it is slight. I posted my comments here:

https://web.archive.org/web/20160324133 ... ification/

Feel free to discuss or even repost on gold forums. Just thought I'd put my thoughts out there because I see a lot of marketing spin around these products and I think people should understand what I believe is the reality of the situation.

ETFs are a good product for what they were intended to do (easy access to gold), but they are not a substitution for a more robust geographic diversification strategy. I will post on this more in the future.

[smurff]

Thanks for the blog post. I'm still waiting for that book!

[WildAboutHarry]

How about GTU as a reasonable alternative to the precious metal ETFs?

It has its own idiosyncrasies (it is a closed-end fund, so there are premium/discount issues), but it appears to really hold the physical gold it says it does and the gold is held in Canada so you get a minor degree of geographic diversification (for a US HBPP).  Costs are reasonable, etc.

The fund has to hold at least 90% of assets as gold bullion, the gold is held in segregated storage, cannot be pledged as collateral, loaned, etc.

[craigr]

How about GTU as a reasonable alternative to the precious metal ETFs?

It has its own idiosyncrasies (it is a closed-end fund, so there are premium/discount issues), but it appears to really hold the physical gold it says it does and the gold is held in Canada so you get a minor degree of geographic diversification (for a US HBPP).  Costs are reasonable, etc.

The fund has to hold at least 90% of assets as gold bullion, the gold is held in segregated storage, cannot be pledged as collateral, loaned, etc.

It's not a question of whether the funds hold the assets. I believe they all do more or less. It's just a question of what the investor wants from the product. If they want the safety of geographic diversification, they are not really going to get it from an ETF. Mainly because you won't have an easy time proving ownership of the fund in an emergency that involves your broker.

They have their place and GTU/CEF are good alternatives to other ETFs. But these ETFs are for convenience, not safety of geographic diversification. IMO.

[murphy_p_t]

Craig, I agree completely. Seems to me the greatest component of geographic risk is risk from the national government where the brokerage firm is located. These ETFs, held ***in your domestic brokerage***, offer zero protection from a gov't bureaucrat locking down your account.

It seems to me the next greatest threat to your portfolio is just being inside the financial system. The ETF has to be traded on an exchange which is open for trading. Again, the ETF offers zero protection for this.

If you think that the ETF price cannot deviate substantially from the NAV at some future point...such as mass redemptions by commercial holders...good luck with that.

If I'm correct in accessing the greatest threats to your portfolio, your insurance won't be there if any of these becomes a factor.

To be blunt, my view is that you're fooling yourself if you think you have any meaningful geographic diversification by buying ETFs thru your domestic broker.

[bronsuchecki]

May I humbly suggest the Perth Mint's "etf" traded on the Australian Stock Exchange (ASX) under code PMGOLD:

• management fee 0.15% pa - lowest in the world I believe
• redeemable in any of the Perth Mint's coins and bars with no minimum - no etf does that and protects against any NAV divergence or unfair pricing on the exchange, just take the metal and sell it for its real/fair value
• can be liquidated for cash at full metal value directly from Perth Mint
• operates under a Government Guarantee of the Western Australian (state, not federal) Government

We put the last two features in exactly for the situation where the ASX is closed/not trading for whatever reason. As long as you hold the shares in your name on our stock register with Computershare (not through a nominee or in street) name, then we can identify you individually and you can redeem for metal or cash directly from us in those extreme circumstances. Not sure how you would achieve this for overseas investor, probably invest via an Australian broker.

Note PMGOLD is basically a securitised version of our Unallocated Program, so there is no bar list as PMGOLD is backed by our operational metal.

[craigr]

May I humbly suggest the Perth Mint's "etf" traded on the Australian Stock Exchange (ASX) under code PMGOLD:

• management fee 0.15% pa - lowest in the world I believe
• redeemable in any of the Perth Mint's coins and bars with no minimum - no etf does that and protects against any NAV divergence or unfair pricing on the exchange, just take the metal and sell it for its real/fair value
• can be liquidated for cash at full metal value directly from Perth Mint
• operates under a Government Guarantee of the Western Australian (state, not federal) Government

We put the last two features in exactly for the situation where the ASX is closed/not trading for whatever reason. As long as you hold the shares in your name on our stock register with Computershare (not through a nominee or in street) name, then we can identify you individually and you can redeem for metal or cash directly from us in those extreme circumstances. Not sure how you would achieve this for overseas investor, probably invest via an Australian broker.

Note PMGOLD is basically a securitised version of our Unallocated Program, so there is no bar list as PMGOLD is backed by our operational metal.

Hi Bron,

Of the ETFs, the one from Canton Bank of Zurich also has strong backing from a well established bank guaranteed by the state of Zurich, but it can't be bought by US persons without additional risks. I'm not sure PMGOLD would work for US persons. There could be some bad tax consequences as a foreign investment company here. FWIW.

How does a holder of the ETF when it is in the street name of the broker prove they are owners? Do they not need to obtain the actual stock certificates? And if so, then aren't they just better off buying the gold certificates through your dealer program or direct?

I guess I'm just coming back to my point which is that ETFs are for convenience above all else. It seems if you're going to go through the trouble of obtaining the certificates or registering them in your name that it is just as much hassle to open an account at Perth Mint or buy a certificate. Seems like just one less thing to go wrong.

Thanks for taking the time to post Perth Mint's perspective here. You have a good program down there for gold storage and geographic diversification.

[bronsuchecki]

Can you clarify the "foreign investment company" point. I used EFT in inverted commas because PMGOLD is not structured like a normal ETF, but operates practically the same way. Legally PMGOLD is defined as a fully paid call option for physical gold. So you could say that it is legally a derivative but because you pay the full value of the metal upfront and we purchase and back it with 100% metal then there is no leverage or optionality as such. We structured it that way to specifically avoid having to incorporate a company or trust to hold the gold as that introduced more costs and management, plus it allowed some fund managers to invest it in whereas with normal ETFs they would be precluded due to the beneficial ownership aspect.

Re stock certificates, I do not believe that is possible in Australia. If you do not have any margin facility or other pledging aspect with an Australian broker (in which case they would hold the shares in their name through a nominee, I believe) then your name is recorded on our share registry, which in Australia performs the same function as getting a stock certificate, but without the pain when you go back to sell. In this respect you can protect yourself from broker failure quite easily but retain transactional simplicity - no hassle involved at all. Your US system I'm afraid is so out of date.

[FarmerD]

But even with the Perth Mint programs, isn't there still a paper trail that leads directly from you to the Perth Mint?  Even if you ignore the mandatory reporting of foreign holdings, this paper trail should be easy for the US Govt to track even if you don't report it.  So if gold goes parabolic, the US govt knows what and where you have your gold.  I suppose you could fly to Australia and physically pick up your gold and try to start all over there but you'd be an international fugitive who will be tracked down.  

If gold goes parabolic and you forsee US govt imposing punitive taxes or prohibiting ownership of gold, wouldn't it be best to simply begin diversifying your gold holdings into land ownership?

Someone please point out where I'm going wrong here with my thoughts........

[craigr]

Can you clarify the "foreign investment company" point. I used EFT in inverted commas because PMGOLD is not structured like a normal ETF, but operates practically the same way.

As a point, I know financial advisors in Switzerland that are SEC registered. They won't put Americans into non-SEC registered financial products because the tax treatment is very bad. This even though the products they have in Europe are just as good (if not better in some cases such as ZGLD) than what is available on US markets.

Re stock certificates, I do not believe that is possible in Australia. If you do not have any margin facility or other pledging aspect with an Australian broker (in which case they would hold the shares in their name through a nominee, I believe) then your name is recorded on our share registry, which in Australia performs the same function as getting a stock certificate, but without the pain when you go back to sell. In this respect you can protect yourself from broker failure quite easily but retain transactional simplicity - no hassle involved at all. Your US system I'm afraid is so out of date.

I think it is not out of date, more intended. In Switzerland for instance the banks charge higher commission on stock trades because they are obligated to hold the securities purchased as a custodian on your behalf. Meaning that they can't use the securities for lending, etc. as US brokers do to make money. So they charge more up front. The reason why US brokers can charge so little on trades is because they often can use your securities for their own uses to make money. Perhaps Australia has similar protections?? I'm afraid I don't know much about how it works down there.

Personally if an American wanted to own gold in a very safe way I'd steer them towards the Perth Mint's programs as one of the available options over an ETF. For just a little more legwork, they get what I think is a far more robust solution in terms of guarantees and safety over any ETF on US markets.

[craigr]

But even with the Perth Mint programs, isn't there still a paper trail that leads directly from you to the Perth Mint?

There is always a paper trail. If you wire money you can be sure someone is keeping a record of it. FinCEN in the US certainly is watching wires going out of the country. Hiding overseas assets is illegal so you should just declare them and not worry about it. I'd rather just remain inside the guidelines than worry about a letter from the IRS, tax court and big fines and possible prison terms.

Even if you ignore the mandatory reporting of foreign holdings, this paper trail should be easy for the US Govt to track even if you don't report it.  So if gold goes parabolic, the US govt knows what and where you have your gold.  I suppose you could fly to Australia and physically pick up your gold and try to start all over there but you'd be an international fugitive who will be tracked down.  

Well I would just counter by saying this. If you are not involved in criminal activity like tax evasion, drug running, terrorism, embezzling, etc. the US government isn't going to care about your declared foreign account.

And even if they do know about, it doesn't mean they can access it without a valid reason in the foreign country where it resides. The Perth Mint employees operate under criminal penalties for disclosing customer account information. They will only act from a legitimate court order from an Australian court. They aren't going to respond to some US order to turn over assets without proper authority. That would be a huge political fiasco and would destroy a very lucrative business for western Australia. There would be significant blowback.

If gold goes parabolic and you forsee US govt imposing punitive taxes or prohibiting ownership of gold, wouldn't it be best to simply begin diversifying your gold holdings into land ownership?

I don't worry about this stuff because it's very unlikely to happen. I'll deal with it if it does.

But if there was an emergency and you heard debate in Congress about doing such things, then by all means grab your passport and head to Perth to buy some beachfront property or a rental place. Turn the liquid asset into something much harder to repatriate.

Or you could just act quickly and bring the funds back to the US, then immediately dump the dollars and buy tangible goods here. That way you'd be compliant with US requests but still protect yourself.

Or you could hire an attorney here and in Australia. Tie those funds up under a pile of international red tape. Make sure your attorneys are good at making things go really slowly. Drag your feet as long as you can. The object isn't to win, but to buy time. In a currency emergency, time is your friend. The longer the delay, the better chances you have of coming out less worse off.  

So there are options. But I wouldn't spin myself up over these extremes. In the end, someone with some funds at Perth Mint is much better off than someone with all their funds inside of a single country (even to include ETFs that hold gold overseas). IMO. The Perth Mint solution is going to be much stronger than any ETF and will give you options to respond to emergencies that most other people here wouldn't have.

[WildAboutHarry]

They have their place and GTU/CEF are good alternatives to other ETFs. But these ETFs are for convenience, not safety of geographic diversification. IMO.

Agree about precious metal ETFs and CEFs as not being a full Harry Browne-style form of geographic diversification.  But in today's legal climate that is about the only form of "retail" geographic diversification one can do.

Although I haven't read GLD's prospectus in a while, my recollection is that GTU's governance provides a significantly different and potentially safer gold "experience" compared to GLD (e.g. reduced counterparty risk).

[craigr]

They have their place and GTU/CEF are good alternatives to other ETFs. But these ETFs are for convenience, not safety of geographic diversification. IMO.

Agree about precious metal ETFs and CEFs as not being a full Harry Browne-style form of geographic diversification.  But in today's legal climate that is about the only form of "retail" geographic diversification one can do.

Although I haven't read GLD's prospectus in a while, my recollection is that GTU's governance provides a significantly different and potentially safer gold "experience" compared to GLD (e.g. reduced counterparty risk).

I agree that ETFs are convenient, but they are not the only retail option available. Perth Mint for instance is about as easy and likely more robust.

Just recognize that in a market emergency the ETFs are not going to be trading. Unless what you own is in your name and you have some way to prove that, the promises of ETFs paying you out in gold is just not going to happen. IMO. It doesn't matter if they store gold on the moon. Without the system to prove ownership, you are stuck.

At least with the Perth Mint you have a certificate or an account directly at the mint with ID they keep on record to allow you access in a true emergency. No (American) ETF is going to do that.

[MachineGhost]

I've been accused of doing some perverse things to the PP but, truly, all gold ETF's are now ghastly to me.  It reminds me of a poem by William Blake:

TIGER, tiger, burning bright
In the forests of the night,
What immortal hand or eye
Could frame thy fearful symmetry?

In what distant deeps or skies
Burnt the fire of thine eyes?
On what wings dare he aspire?
What the hand dare seize the fire?

And what shoulder and what art
Could twist the sinews of thy heart?
And when thy heart began to beat,
What dread hand and what dread feet?

What the hammer? what the chain?
In what furnace was thy brain?
What the anvil? What dread grasp
Dare its deadly terrors clasp?

When the stars threw down their spears,
And water'd heaven with their tears,
Did He smile His work to see?
Did He who made the lamb make thee?

Tiger, tiger, burning bright
In the forests of the night,
What immortal hand or eye
Dare frame thy fearful symmetry?

Get the real thing, not a paper tiger.

MG

[MachineGhost]

And even if they do know about, it doesn't mean they can access it without a valid reason in the foreign country where it resides. The Perth Mint employees operate under criminal penalties for disclosing customer account information. They will only act from a legitimate court order from an Australian court. They aren't going to respond to some US order to turn over assets without proper authority. That would be a huge political fiasco and would destroy a very lucrative business for western Australia. There would be significant blowback.

But just as a caveat, its certainly within the realm of possibility for a coordinated multi-country gold confiscation to bring about a regional currency, a one world currency or to back the IMF's SDRs in the next debt/monetary crisis.  Anglo-Saxon nations aren't necessarily diversification from each another.

MG

[BearBones]

There is always a paper trail...

Even if you ignore the mandatory reporting of foreign holdings, this paper trail should be easy for the US Govt to track even if you don't report it.  So if gold goes parabolic, the US govt knows what and where you have your gold...

Slightly off topic, but in the event of a "hyperbolic" gold price scenario with secondary gold confiscation, how likely is it for the government to successfully track down physical gold, either held in the U.S. or elsewhere? There is always a paper trail of gold trades, even if done on eBay. But most/all of physical gold trades are not reported, right? And it seems improbable that we'd get to the point where everyone's checks and bank wires from years past are being scrutinized to the detail necessary for this to become a major threat.

Thoughts?

[bronsuchecki]

In respect of the confiscation issue, I've written a very detailed analysis of the possibility of that in Western Australia here http://goldchat.blogspot.com/2008/11/au ... ation.html

In short, it is possible but I think the political situation that would exist in those circumstances does not make it certain - West Australia has previous attempted to secede from the Federation and I think a gold confiscation/expropriation by a Federal Government could be a trigger for West Australians to secede as it would be seen as the rest of Australia just taking West Australia's gold.

Just read this http://economics.org.au/2012/02/does-ca ... secession/ which is a 1974 article by Lang Hancock which includes this recommendation for a constitution for a seceded West Australia "Fourthly, we would need to tie our currency to gold and conduct our trade in gold, as the oil-rich Arab States are doing." FYI Gina Rinehart, Australia's richest person, is the daughter of Lang Hancock.

[steve]

How about GTU as a reasonable alternative to the precious metal ETFs?

I like GTU for a number of reasons, ease of rebalance, possible tax advantages, the structure of closed end fund etc. I like Vanguard as my financial intermediary because I hold it in my brokerage account. I feel this adds safety because they have more power then I have as an individual if something were to happen. GTU holders do not redeem for gold, they redeem for cash when they sell units.
I also have core bullion under my own control for unforeseen emergency that being said I do not know if I like the concept of geographic diversification in terms of being able to go somewhere and retrieve my holdings. If something really bad happened I would not want to be separated from my holdings. What if I could not go there to retrieve it? What if Americans were no longer allowed to leave the county or other unforeseen developments? Too me this adds not reduces risk. Geographic diversification may be ok because you do not want everything destroyed in an earthquake or something like that but not for the reason of going there to retrieve your holding. GTU allows me to rebalance my Gold in a tax efficient manner and keep it simple. If my GTU holding was a total loss and became worthless it still would not devastate my total portfolio.
If things became so bad that exchanges stopped trading and planes stopped flying there wouldn't be much an individual could do other then being self reliant and wait it out until thing get sorted. If you have half of your Gold 12.5% overseas how much could that really protect you anyway?

[FarmerD]

BearBones,
I don’t think the govt will even bother trying to track down physical gold because it is so cumbersome.  However the govt has more efficient ways of separating gold owners from their wealth.  

If gold goes parabolic, that means unemployment skyrockets and the economy craters.  There will poor people rioting everywhere crying out for more govt assistance and political class larvae will cater to the mob ala FDR.  Gold holders who have profited from the gold explosion will become prime targets.   In this case, the US govt wouldn’t bother to try to confiscate it.  Rather they would just tack on a windfall profit tax (similar to what happened when oil companies became a little too profitable) onto gold sales.    If gold spike to say $10,000/oz, then you may see something like a 75% windfall tax.  

About the only way out of this for gold owners is to dump their gold when they suspect this scenario may play out and buy land (assuming the windfall tax isn’t retroactive).  To my thinking, it doesn’t make any difference whether the land you buy is in Australia or the US.  The tax man will catch up with you no matter what you do because sooner or later you will have to sell your gold.
 
Certainly Craigr is more knowledgeable on this issue than me, but honestly this is uncharted territory.  The scenario I just painted above makes sense to me.  


CraigR, MedTex, others, please chime in. 

[craigr]

And even if they do know about, it doesn't mean they can access it without a valid reason in the foreign country where it resides. The Perth Mint employees operate under criminal penalties for disclosing customer account information. They will only act from a legitimate court order from an Australian court. They aren't going to respond to some US order to turn over assets without proper authority. That would be a huge political fiasco and would destroy a very lucrative business for western Australia. There would be significant blowback.

But just as a caveat, its certainly within the realm of possibility for a coordinated multi-country gold confiscation to bring about a regional currency, a one world currency or to back the IMF's SDRs in the next debt/monetary crisis.  Anglo-Saxon nations aren't necessarily diversification from each another.

I guess. But you know what globalist planners want and what really happens are two different things. Reality often gets in the way of utopian dreams. I think when the Euro finally implodes it will set back the idea of one world currency at least 50 years.

Besides, what would a country like Australia get by linking their economy to the biggest debtor nation on the entire planet? Probably the same thing Germany is getting right now by marrying Italy, Greece and Spain with their money.

[craigr]

There is always a paper trail...

Even if you ignore the mandatory reporting of foreign holdings, this paper trail should be easy for the US Govt to track even if you don't report it.  So if gold goes parabolic, the US govt knows what and where you have your gold...

Slightly off topic, but in the event of a "hyperbolic" gold price scenario with secondary gold confiscation, how likely is it for the government to successfully track down physical gold, either held in the U.S. or elsewhere? There is always a paper trail of gold trades, even if done on eBay. But most/all of physical gold trades are not reported, right? And it seems improbable that we'd get to the point where everyone's checks and bank wires from years past are being scrutinized to the detail necessary for this to become a major threat.

Who knows? But if this is the case why would they be interested in tracking down individuals? They will have a hard enough time keeping a full on revolution from happening. I don't think much about these things. They are extreme events and the likelihood of it happening just as we think it may is remote. Besides, having some gold you can get in an emergency at least gives you options to respond that others do not have.

[craigr]

I do not know if I like the concept of geographic diversification in terms of being able to go somewhere and retrieve my holdings. If something really bad happened I would not want to be separated from my holdings. What if I could not go there to retrieve it?

The idea is not just for government taking things. IMO that is the lowest on the list. However the more probable is perhaps a manmade or natural disaster that affects the financial center of the US. Wall St. was shut for five days after 9/11. During WWI it was shut for months. So talk about not being able to get access to funds, that's it right there! If you have money in a foreign country you will still be able to get access to it in most likelihood.

What if Americans were no longer allowed to leave the county or other unforeseen developments?

Not being able to leave is the exact reason why you want money somewhere else. Any country that is not allowing citizens to leave is one you need to leave immediately in any way possible. That story always has a bad ending and having gold overseas is your safety net to start over.

If things became so bad that exchanges stopped trading and planes stopped flying there wouldn't be much an individual could do other then being self reliant and wait it out until thing get sorted. If you have half of your Gold 12.5% overseas how much could that really protect you anyway?

It's funny because I mention this exact thing in the book. This attitude of keeping everything in one country is very American (or even Canadian?). But if you speak to people that live in places like Latin America or even Europe the attitude is much different. In those places, due to their history, many people think keeping some money elsewhere is a really good idea. But the US has had no major conflict on its soil in over 150 years and the dollar has been relatively stable and trouble free. I think in a way the memory of these kind of disasters and sometimes needing to flee in an emergency has been lost. To other cultures that have been through these events more recently having assets geographically diversified is seen as a prudent maneuver.

[craigr]

Too me this adds not reduces risk.

But let me say that I agree with you on this point that what many people do to geographically diversify does increase risk. There are many bad ways to do it (like putting money in third-world areas or other "tax havens" that are run by con artists). But putting money in a Swiss or Australian provider is not the same thing. They are first-world countries with strong protections and accountability in place like the US. In places like Switzerland it is even stronger. And from what I know of the Perth Mint, probably just as good as what the Swiss offer today.

[craigr]

About the only way out of this for gold owners is to dump their gold when they suspect this scenario may play out and buy land (assuming the windfall tax isn’t retroactive).  To my thinking, it doesn’t make any difference whether the land you buy is in Australia or the US.  The tax man will catch up with you no matter what you do because sooner or later you will have to sell your gold.

I just have a hard time speculating on stuff like this because it is just remote. Sure a windfall tax can come, but you know you can make a decision at the time how to deal with it. Maybe you don't sell the gold at all? Maybe you just hold onto it until the crisis passes and the people in power are flushed out? Or you just barter it with other people for stuff you need? Who knows? There are all sorts away around these scenarios if they should ever happen.

[rickb]

If the US government wants your gold, it doesn't need to pass any "windfall profit tax".  The way FDR did it in the 30's was much more direct.  Sell your gold to the US government now, or face severe penalties.  See http://en.wikipedia.org/wiki/Executive_Order_6102.