Gold Eagle Acquisition Cost and PP Rebalance Valuation?

[Perm Port Fan]

After virtually eradicating expense in the bond, cash and equity sectors I'm puzzled over the problem of accounting for the high cost of Gold Eagles. I'm going to be implementing 'Level 4' (PP p.187), and I like the rationale for owning Eagles, but the front end load situation looks rather stark in comparison to the other sectors.

In rebalancing, would the acquisition cost (or spread) be considered a cost of maintaining the whole portfolio, and thus be taken off the top before the 25% split?

And I'm curious to know, how exactly are the Eagles valued in comparison to the other sectors? Is the buyback price or spot price used? Assuming it isn't the acquisition price.

None of this makes me any less of a PP fan. But I do pity the investor who bought in the 1600's, lost the 4% driving off the showroom floor, and then saw the asset nosedive halfway to a rebalance point. Hopefully there is an accounting rationale that would make this look less painful than it really is.


 

[rickb]

If you want an asset that has no counter party risk there really aren't many alternatives.  To some extent this is what the 4% (or whatever it is) is buying you.  In addition, after you pay the 4% you are in charge of whether there's an ongoing ER.  If you keep your gold in a bank safety deposit box, maybe you don't insure it and if you get a box "for free" from your bank then your ER is 0%.  Ditto if you keep it in your own safe (or safe place).  Even a 0.4% (or 0.25%) ER adds up over 10-20 years.

And, when you sell, you may be able to sell at a premium to spot.  I'm not sure I'd count on this - but it's definitely a possibility.

As far as valuation for rebalancing purposes, you can either use the current buyback price or the spot price.  It won't really make much difference, so do whichever of these you find easier (or prefer).

[Pointedstick]

But I do pity the investor who bought in the 1600's, lost the 4% driving off the showroom floor, and then saw the asset nosedive halfway to a rebalance point.

*waves*

This is why I like bars: the spread is lower. And of course, if you're investing a large sum all at once, you can buy even bigger bars to decrease the spread per ounce even more.

[Tortoise]

Perm Port Fan, the bid-ask spread on a gold bullion coin (4%, say) is amortized over your holding period. For people who like thinking of investment costs in terms of ER, the longer you hold the coin, the lower your "effective ER" is.

For example, if you buy a Gold Eagle at a 2% premium and sell it 10 years later at a 2% discount (i.e., a 4% spread), your effective ER (excluding storage/insurance costs) is 0.4%. If you instead sell it 20 years later with the same 4% spread, your effective ER drops to 0.2%, and so on.

So if you sell a gold coin before you've held it for at least 10-20 years, it's probably not quite as cheap as holding, say, shares of IAU or GLD. But even then, as rickb pointed out, it might help to think of the slightly higher up-front cost of coins as a safety premium (the cost of avoiding counter-party risk).

As for checking the price of my gold coins for rebalancing purposes, I just use gold's spot price to keep things simple.

[Ad Orientem]

But I do pity the investor who bought in the 1600's, lost the 4% driving off the showroom floor, and then saw the asset nosedive halfway to a rebalance point.

*waves*

This is why I like bars: the spread is lower. And of course, if you're investing a large sum all at once, you can buy even bigger bars to decrease the spread per ounce even more.

+1
Buy a few gold coins for emergencies. They have some advantages in that they are recognizable and would likely be accepted as money. But for the rest, especially if you have a sizable amount of money to invest, I'd stick with bars.

[Aught_1]

Hi Perm Port Fan,

I don't know if you have a specific dealer that you use and/or like, but ColoradoGold.com seems to pay more than most when selling to them if you also bought from them.  As of today (6/20), they will sell 1 oz. American Eagles for $1,417.76 (if buying less than $25k) and will buy them for $1,377.70.  That's a round trip spread of only 2.8%.

[Ad Orientem]

Hi Perm Port Fan,

I don't know if you have a specific dealer that you use and/or like, but ColoradoGold.com seems to pay more than most when selling to them if you also bought from them.  As of today (6/20), they will sell 1 oz. American Eagles for $1,417.76 (if buying less than $25k) and will buy them for $1,377.70.  That's a round trip spread of only 2.8%.

The markup on coins has moved beyond the bounds of reason. With gold trading at around $1300 oz. there is no way in the hot stinky bad place that I would pay 9% over spot for the benefit of a coin. For those at or near rebalancing bands look at small bars.

[sophie]

Hi Perm Port Fan,

I don't know if you have a specific dealer that you use and/or like, but ColoradoGold.com seems to pay more than most when selling to them if you also bought from them.  As of today (6/20), they will sell 1 oz. American Eagles for $1,417.76 (if buying less than $25k) and will buy them for $1,377.70.  That's a round trip spread of only 2.8%.

The markup on coins has moved beyond the bounds of reason. With gold trading at around $1300 oz. there is no way in the hot stinky bad place that I would pay 9% over spot for the benefit of a coin. For those at or near rebalancing bands look at small bars.

So what if there was a mild SHTF, and people wanted to sell gold, but the dealers would only give you 15% under spot. Then what? This is something you have no control over.

Being one of those people who bought coins when prices were in the 1600s (wave back, PS!), after today's plunge I'm wondering about tax loss harvesting.  I wonder if trading coins for bars would get around the wash sale rules????

BTW I just checked Goldmart and coins are selling at a bit over 4% > spot.  Where are you seeing 9% over spot, Ad?

[Ad Orientem]

BTW I just checked Goldmart and coins are selling at a bit over 4% > spot.  Where are you seeing 9% over spot, Ad?

I was going by Aught's quote of $1417.