Still a bit perplexed by direct gold ownership

[Rjg]

Been lurking for a 6 months, read Craig's book and finally committed my IRA and after tax portfolio to an all etf pp. I'm still trying to understand the benefits of direct gold ownship however. In the book everything seems rational until the gold chapter where it seems as if advice in other chapters is contradicted.
-spending 1-5% in commissions would be rightly criticized for any other asset
-spending 1% a year management fees (or in this case insurance and storage costs) would also be criticized.

That means over 30 years you are guaranteed to lose 30% atleast to fees. That's probably 50% more than a gold backed etf! And all to prepare for a very tail risk of:
-us govt confiscating gold held in the US
-gold etfs turning out to be frauds.
-the aftermath of an apocalypse that allows you to use it as money (assuming you can somohow get to Switzerland or Australia to lay your hands on it)
Plus in the beginning of the book Craig even points out that if gold goes to 0 you only lose 25% of your portfolio. In other words the structure of the pp itself provides natural "tail insurance".

All in all the reasoning for direct gold ownership seems to border on a fetish to be able to see and touch some gold coins for a very high price. Ive also noticed that this is the aspect Of the pp that seems to turn off most people I explain the concept to.


Would appreciate any insights...

[frugal]

Hi,

For me it is also tough to diversify so much.

Diversify is important, is more expensive, takes more time to manage...

- several brokers
- several etfs for each of the 4 assets of hbpp

How ETFs can be fraud?


Tks

[Pointedstick]

If your time horizon is long enough and your faith in the system is strong enough, a lot of the PP protections become less important.

For example, we hold cash in T-bills rather than savings accounts or bank CDs because the latter two can become inaccessible for a period of time during ordinary recessions when banks are restricting withdrawals or failing entirely. If you can afford to be without your cash for months, then you could probably afford to wait it out for the FDIC to reimburse you (assuming you were under the limit).

Similarly with gold, if your gold ETF's trustee turns out to be cooking the books and the fund goes bankrupt, it may be months or even years before a bankruptcy judge figures it all out and makes an effort to get investors back what money he can. If you're okay with that risk, then it is indeed true that a gold ETF offers you lower spreads and lower recurring costs (assuming you don't store your gold yourself).

Of course, these are both "ordinary" financial disasters. Neither prepares you for an extraordinary disaster such as the collapse of the FDIC wiping out your bank-based cash position entirely, or such complete fraud and government corruption that your never see a dime from your evaporated position in a bankrupt gold ETF.

I suppose your desire to protect yourself from such an extraordinary disaster depends on your belief in the likelihood of one occurring, the sum of the affected funds, and your ability to replace those funds through work. It would be much harder for a retired 65 year-old to replace 500k in lost gold and cash than a gainfully-employed 25 year-old to replace 10k.

[frugal]

By that point of view, CASH should be at home like GOLD, so 50% of total PP ?

Cash in a SOLID country returns almost 0%!



Thank you.

[Pointedstick]

By that point of view, CASH should be at home like GOLD, so 50% of total PP ?

Cash in a SOLID country returns almost 0%!

Thank you.

It depends on your situation. In the USA, we have a thing called TreasuryDirect which allows you to own T-bills and bonds directly through the government with no broker or fund or trustee of anything.

You have to determine what level of risk you're comfortable with. I'm young too, and I have a relatively small portfolio compared to my earning ability, so I'm a lot more comfortable with ETFs than I would be if I were older. That said, I do directly hold my bonds and about 1/3 of my gold, and I'm considering holding my cash directly too.

There's risk in everything. Holding all your cash and gold at home increases the risk of loss in the case of fire or burglary. Your assets can never be totally safe.

[Rjg]

Right..in the book Craig talks about the "risk/reality" spectrum I think. It seems like holding gold coins at home is a lot more risky than holding 2 gold etfs at different insirituons.

[WildAboutHarry]

Holding physical gold, and the costs thereof, and comparing that to the costs of owning stocks, bonds, mutual funds, ETFs, etc. is not exactly an apples to apples comparison.

Aside from precious metals, there are virtually no investable assets with direct ownership anymore, or at least not without a lot of hassle.  I don't see a silo of grain, a tanker of oil, or a pen full of hogs in my investing future anytime soon.

Bearer bonds are gone (and those would have had storage/security issues).  You can get stock certificates and hold those, but at some cost.

Everything else in the HBPP, aside from physical gold, now has counter party risk (except, perhaps for federal reserve notes, and those have problems all their own).  Holding your PP in an IRA or 401(k)?  You don't own that!  It is held in trust on your behalf.  Have a taxable account?  Assets are held in street name, so your ownership is indirect.

Worried about confiscation of gold?  A gold ETF is far easier to get at then a handful of K-Rands in the cookie jar (not that I am advocating cookie jar storage )

And of course I haven't even played the MF Global card yet.

Even assuming a 5% mark up for gold, that is a bit more than 1/10 of 1% or so per year.  And 1% per year for storage and insurance is way high.  You should be able to buy, store, and insure gold for at least the fee on PRPFX if not less.

Investing in physical gold is an investing anachronism.  Enjoy it while you can.

[smurff]

I think that Americans have a hard time visualizing the kinds of terrible things that can happen with financial assets compared to people of other nations, who have actually had to endure a lot of contemporary SHTF over money.

If one had been from Zimbabwe, Argentina, Mexico, Russia, Iceland, Italy, to name just a few countries that have seen SHTF  currency collapses and controls since the 1990s (France in the 1980s), one would understand gold.  When something happens so gold is needed to protect the portfolio, a 5% commission will look like an absolute bargain.

Think of gold as an asset with an insurance feature.  We buy life insurance or homeowners insurance just in case of foreseeable disaster.  Same thing with gold-- it helps cover the foreseeable disaster of currency collapse (along with a few other foreseeable financial crises).  Europeans and Asians and Africans have endured so many pogroms, "cleansings," and wars played out on their own soil, well within the living memories of most people alive in those places today.  So the idea of a currency crisis some day is foreseeable, no matter what provokes it  (including non-violent events like government- sponsored inflation, race- to- the- bottom currency war, a series of massive fraud and corruption schemes), and the idea of owning gold, and keeping that ownership quiet, is a given. 

Not so for Americans, for whom nothing like that has happened since the 1930s Great Depression--for most of us,  long before our parents and even grandparents were born.  Having to flee the USA and start over elsewhere because of a class or ethnic shooting war, losing all your paper assets in a fraud scheme not insured by the fdic or sipc, having the government forbid your taking more than $200 of your own money out of the country-- these things are not foreseeable to many Americans, and even sound like semi- mad ravings of conspiracy theorists.  And since we don't tend to foresee it, we dismiss the possibility of it happening, and don't tend to insure against it.

Now if we're just talking about the inflation- protection features of gold, yes, I agree that 5% sales commission and annual storage fees are a bit much.

[bronsuchecki]

Rjg, if you are of the view that you can't see the costs of holding physical justified by the risk of some SHTF financial collapse, then just buy unallocated with the Perth Mint and you have no ongoing storage cost nor coin/bar premium markups.

With ETFs I don't see the point holding multiple ones - they pretty much all have the same legal wording, the metal is stored in London, and they all trade on American stock exchanges - so the risk profile is the same. Accordingly I would go with the lowest cost ETFs being IAU at a management fee of 0.25% if you don't want to go to the trouble of opening an account directly with the Perth Mint.

[Rjg]

Is there any advantage to unallocated gold storage vs an etf? I guess it gives some international diversification but there's still counterparty risk right?

Wondering if it's a good idea to buy some gold jewelry like a watch as a partial shtf scenario. If I'm going to have to insure it and pay commissions anyway I might as well get something that's useful right?

[smurff]

Wondering if it's a good idea to buy some gold jewelry like a watch as a partial shtf scenario. If I'm going to have to insure it and pay commissions anyway I might as well get something that's useful right?

People have done this for ages.  It's probably one of the original ways to store wealth.  But jewelry has an even bigger cost over its gold content, primarily to pay artisans for design, manufacturing costs, and provide a retail profit margin.

[frugal]

losing all your paper assets in a fraud scheme not insured by the fdic or sipc

Hi,

can you please comment the topic:

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=7

THANK YOU

[k9]

I second what smurff said. Don't underestimate the possibility of an event destroying your financial assets. Gold's value comes from the fact it is a hard asset rather than a financial one. So why own it in a financial way ?

In XXth century Europe, there have been many examples of very different situations where gold ownership (I mean, real gold ownership, not having someone keep it for you) was the difference between ruin and a somewhat better life. Think Germany's hyperinflation, the German or Polish jew in 1930's, France during WWII, socialist countries all over Europe between 1930's and 1990, the implosion of Serbia at the end of the century, etc. Talk about tail risk, I think more than 80% of the European population has been concerned by a financial disaster in less than 80 years. And Europe is not third-world, it was the top of the civilized world back then.

Of course, I shouldn't forget to mention the rest of the world, USSR itself, Cuba, Argentina, Zimbabwe, etc. Reasons all over these situations were ranging from hyperinflation to confiscation of assets, some countries having known both in a few years (Germany with nazis, Zimbabwe in the 2000, Argentina had a corralito + strong inflation in the same period).

Global, overall prosperity, political & financial freedom in almost 80 years in the USA is a positive black swan, very unlikely tail risk, not the other way around.

Another thing. You say a gold ETF is far less expensive than direct ownership of gold. But ETF sellers are supposed to support these costs too and earn some more money for a living. Not including your broker's fees. What's the trick ? What would you think if I was opening an ETF for LT treasuries that was yielding more than treasuries themselves ?

Difficult rebalancing and risks of theft are an issue, though, but nothing is perfect. Maybe the wisest thing to do is to have some of your gold as an ETF to reduce costs a little, facilitate rebalancing and sleep better about burglars, I don't know.

[HB Reader]

Rjg --

In the long run, the spread/commission/sales tax or other fees you pay for owning gold coins or bars is insignificant compared to the benefit of having a private, fungible, historically valuable, and universally recognizable asset that you alone own, control, and can transport with virtually no interference from anyone.  Especially if the coins or bars are held in a safe deposit box or physical safe in a secure location.  Cash bank notes would work equally as well if they weren't being continually debased every year far in excess of the amount of gold that is being mined.  In addition, as a practical matter, most investors (especially those in the acquisition phase) don't have to deal with the act of buying or selling the physical metal very often if they are willing to use ETFs or depositories for 20-30% or so of their gold holdings.   

Yearly safe deposit box or other fees do have to be considered, but in my experience (which includes two decades in which gold was widely viewed as an outdated, or simply stupid, investment) they are also very minor.  A safe deposit box or physical safe can also be a very useful, inexpensive, and secure place to store valuable documents, collectibles, computer backup drives, and other private items.

Based on my experience of over four decades, I'll bet most investors will lose far more in mutual fund, brokerage, and other fees related to stocks and bonds than they will lose on holding gold in a sensible fashion.                   

[Coffee]

I second what smurff said. Don't underestimate the possibility of an event destroying your financial assets. Gold's value comes from the fact it is a hard asset rather than a financial one. So why own it in a financial way ?

In XXth century Europe, there have been many examples of very different situations where gold ownership (I mean, real gold ownership, not having someone keep it for you) was the difference between ruin and a somewhat better life. Think Germany's hyperinflation, the German or Polish jew in 1930's, France during WWII, socialist countries all over Europe between 1930's and 1990, the implosion of Serbia at the end of the century, etc. Talk about tail risk, I think more than 80% of the European population has been concerned by a financial disaster in less than 80 years. And Europe is not third-world, it was the top of the civilized world back then.

Of course, I shouldn't forget to mention the rest of the world, USSR itself, Cuba, Argentina, Zimbabwe, etc. Reasons all over these situations were ranging from hyperinflation to confiscation of assets, some countries having known both in a few years (Germany with nazis, Zimbabwe in the 2000, Argentina had a corralito + strong inflation in the same period).

Global, overall prosperity, political & financial freedom in almost 80 years in the USA is a positive black swan, very unlikely tail risk, not the other way around.

Another thing. You say a gold ETF is far less expensive than direct ownership of gold. But ETF sellers are supposed to support these costs too and earn some more money for a living. Not including your broker's fees. What's the trick ? What would you think if I was opening an ETF for LT treasuries that was yielding more than treasuries themselves ?

Difficult rebalancing and risks of theft are an issue, though, but nothing is perfect. Maybe the wisest thing to do is to have some of your gold as an ETF to reduce costs a little, facilitate rebalancing and sleep better about burglars, I don't know.

For all of these reasons, wouldn't diamonds be a wiser investment?

[smurff]

The "scarcity" around diamonds is generated by James Bond movies and the cartel that controls the mining and cutting of them as well as sponsors the ad campaigns for engagement rings.  They aren't really that rare, but more important they are not fungible.  It takes an absolute expert to price them.  Each expert can come up with different legitimate prices (still at least in the same order of magnitude, however) for the same stone. A ten carat white diamond can be worth $25 million or $2500 depending on the cut, clarity, and color.  Investment-grade diamonds are not that liquid for full value without all those experts around.

With gold, ten ounces of bullion coins will cost the same in Chicago as in Miami, give or take a few dollars difference in premiums and commissions.  They are fungible, so you can trade one bullion coin for another of the same weight, and if you're the buyer of something that will cost a one ounce gold coin, the seller will be indifferent to which of the one ounce gold coins in your pocket he accepts in the transaction.  You don't need written valuations or an expert in the room, even to detect most fakes.  There is daily market trading around the world in gold and gold futures, so it takes only a few seconds to look up the current price.

With that said, there have been times when investment grade diamonds have appreciated in value, and there have also been times when people have escaped war and turmoil with enough diamonds sewn into the hems and seams of their clothing to start over a new life in another land.  (Though this did not work so well when the Russian royal family tried to escape the Revolution in the 1910s.)

If you're going to invest in diamonds as an investment, it should be something you do in addition to gold, not instead of it.  You will also need lots of expert guidance.

[frugal]

Our friend k9 wrote:

"For gold, I really cannot help you, I haven't checked them closely. Investing in 3 trackers from 3 different vendors is of course safer, but be sure these vendors actually hold the gold they are supposed to hold (maybe there are synthetic ETFs for gold too, I don't know)."

PHAU, XAD1, VZLD and GZUR are a safe place?



Tks

[TripleB]

In my mind the beauty of the PP is being able to put 1/4 into gold coins that you can completely take off the grid. As time goes on, the gap between the haves and the have-nots is widening. Additionally, threat of lawsuits is gradually increasing.

If you have assets, then a predatory lawsuit won't simply stop at your insurance cap. Just because you have a $1M umbrella insurance policy doesn't mean the plaintiff will be happy with $1M. If you have another $1M in the bank, they'll sue for $2M. And if the lawsuit has any possibility of winning, your insurance company will settle their end, hand over the $1M and leave YOU to pay for an attorney to defend against the other $1M they are seeking.

If you drive a car, then you have risk of being sued for millions if someone gets killed or severely injured in an accident you're involved in, even if it wasn't your fault.

Imagine you put 10% of your assets into an annuity that's creditor protected. Put another 25% into gold coins that aren't "visible" to an attorney. Maybe 50% of your assets are held within IRAs/401ks. You possibly own your home in a state that offers creditor protection.

When all is said and done, you get into a car accident, the injured party retains an attorney who looks at your assets. You have nothing to be seized. They will accept whatever they can get from the insurance company and call it a day. They won't try to seek damages greater if you don't have the apparent ability to pay because it's not worth their effort (because their attorney works on contingency).

That said, if you're sued and found liable, you are legally required to disclose your gold coins. However, if they are not "in the system" and apparent, then there's less of a chance you will be sued.

There's BS lawsuits going on daily. That's the biggest risk you can mitigate by holding direct gold coins, moreso than the US government collapsing.

As far as fees, just buy the coins, put them in a few different safe deposit boxes, and don't worry about insurance. How many bank safe deposit robberies have you heard of? If the bank catches fire, they have commercial grade fire suppression system. If the bank floods, your coins will be just fine. The biggest risk of using a SDB is having them frozen by a court if you're being sued. However, if you are involved in a situation that might result in liability, you'll have time to go to your SDB and move your coins around before a court order goes through to freeze it.

Again, it's only illegal to fail to disclose your gold coins. If you're simply making them "less visible" it's an effective and legal method to mitigate risk from predatory lawsuits.