Thursday, February 14, 2008

Get both gold and gold stocks

Bullion or Mining Stocks - Do You Have the Right Mix?

Many investors believe their portfolios have exposure to precious metals because they hold stocks in mining companies. But as a safe haven, no gold or silver or platinum stock (or even an ETF) compares with physical bullion.

Posted by sold 2 rent 1 @ 02:35 PM (1124 views)
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10 thoughts on “Get both gold and gold stocks

  • sold 2 rent 1 says:

    In 1933 US citizens were forced to hand in all their gold for a fixed price
    They were not forced to hand in their gold stocks

    See graph of equity markets v gold market valuations
    http://www.thelongwaveanalyst.ca/downloads/Value_03.doc

    I reckon once the value of all gold is the same level as world equities (gold going up and equities collapsing) the governments of these ruined economies will strike to seize the gold at their own fixed price.

    The masses who own no gold wont care and this is what matters for a stable society.
    Just like HPCers don’t care about rich people losing their houses.

    Own both gold and gold stocks.

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  • Interesting article. However, the first paragraph says, “But as a safe haven, no gold or silver or platinum stock (or even an ETF) compares with physical bullion”, but then doesn’t make any further reference to ETFs.

    I’ve gone for ETFs as they track the gold and platinum spot prices (and are backed with physical allocations), and I can sell them at any time. Plus less likely to be seized and more secure (I hope!) To me a paper asset backed by the physical asset seems to be the best policy. Unless I’m missing a point (someone let me know if I am!)

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  • Another interesting article! I’m discounting a lot of it, as it’s talking about leveraged derivatives, and ETFs are not the same. They are backed 100% by physical gold held in a vault. I agree that actually claiming the physical gold could be difficult/impossible, and also a government in crisis could comandeer it all.

    Hopeful that I could sell it at any time in exchange for dollars/sterling and immediately buy something physical before hyperinflation devalues the currency to zero! Weighed ETFs up against the other metal options:

    – gold under the mattress which could be stolen in a burglary/robbery, or
    – gold from bullionvault where you’re unlikely to be able to get the physical gold out anyway
    http://www.bullionvault.com/help/index.jsp?content=FAQs/FAQs_whyBV.html (‘FAQ: Operational’)

    There’s no risk-free option!

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  • The notion that one should hold physical gold is perhaps a little theoretical, except in the case of major financial ructions, the chance of which is probably quite small, CDOs and dodgy bankers notwithstanding. I read an article which said to be sure and hold allocated gold i.e. bars with your name on them, rather than a share in a stash in a bank vault, which I assume is similar to holding an ETF or certificates.

    But perhaps when disaster strikes even that wouldn’t help for reasons above.

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  • s2r1 – going back to yesterday, I’ve had a good look at the graphs you kindly posted to illustrate Elliot theory. Whilst I can understand the idea from the graphs shown, trying to ‘see’ the five waves in the graph of a random stock or commodity appears to be near on impossible – well it is with the ones I’ve just been looking at. Maybe my timeframe is too short. But, if those who know regularly get better than average returns, I’ll concede that there must be something to it – even if it is something as simple as outwitting the other trader using the same theory!

    Anyway, as I said to Techieman a while back, I’ll just leave my stash where it is till sentiment changes. I’ll doubtless miss out on the little ups and downs along the way – but at least I can get on with the day job. It’s satisfying making some money wheeling and dealing – but, for myself, I find it a damn sight more satisfying creating a real object out of some real stuff!

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  • Gold is an interesting one – Im wondering where the next big direction will be, up or down. I think it has a nice potential upside and doubt it will ever drop bellow $750 but we all have to remember that it is only a pretty piece of metal that has had a nice run… if you believe the hype we could see $1500 or more…. ummmmm!
    However it may be the only place to go when inflation gets silly!

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  • Doom & Gloom and S2R1,

    I also choose to buy an ETF (AMEX:IAU) rather than physical gold. I’ve read you link S2R1, and it basically gives three reasons:

    – government may nationalise or seize gold at a price of its choosing. Bullion will only be better if I fail to hand mine in as the govenment will require, and my wealth will then depend on possession of an illegal substance. Trying to sell it would be like trying to sell cocaine now. Bullion in a warehouse would be seized just as gold in the ETF.
    – malfeasance by the ETF administrators. ETF administrators are in a good position. They do not take proprietary positions, but take home 0.5% of the fund as admin fees each year. If I worked as an ETF director would I put myself at risk of going to jail by trying to falsify the assets? There is a lot of red tape in the financial markets. Easier just to follow the rules – their income will continue, and even increase as the depression intensifies and gold ETFs become more popular.
    – shutdown of the financial systems. It may happen temporarily, as in 9/11, but the ETF is a company which you would continue to own a share of, and markets will eventually reopen.
    – if I wanted to buy physical gold and take it away with me, I would be susceptible to rogues to a greater extent than in the ETF. My gold bar would probably turn out to be gold plated lead. There may be some element heavier than gold (depleted uranium?) which could be inserted in the middle to make the weight up. I would never know until I came to sell!
    – some time ago I had some small pieces of gold jewelery that I wanted to sell. Most high street jewelers wanted to charge £25 to value it. Eventually I found one that gave me £13 cash. I do not know if this was reasonable (9 carat cufflinks). The prospect of being in a similar position trying to redeem a substantial amount of money from a gold bar is not enticing.

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  • Missed the currency argument – I will have to sell my ETF for dollars, but the currency does not matter because arbitrage will cause the price to equalise between currencies. Arbitrage is also the mechanism by which the ETF price is controlled to match its NAV. The article gives no details on why it expects those mechanisms to break down.

    I think the article is an unfounded rant:

    “I am concerned about the problems associated with new paper investment vehicles that require more liquidity than the market is able to provide.

    I suppose that if an ETF is having trouble getting their hands on the physicals, (mere claims on some bullion in someone’s vault like Brinks) that they will find analogous ways to get claims on more bullion, not necessarily by buying it but by creating new paper claims against some gold somewhere, if not in a Brinks vault, then some kind of claim on some gold by who knows what method.”

    “If liquidity were to dry up, then of course the claims an ETF has on some gold or silver will sky rocket in value, but how are they to get more silver or gold, if it becomes hard to get ?(more so for silver). They would have to stop taking new money wouldn’t they?”

    Does the author understand what an ETF is? The ETF is a traded share. When you buy an ETF, you are buying someone else’s shares; they are not new issues. Large purchasers may deposit a “creation unit”, an amount of gold which entitles them to a number of new shares.

    “But there are issues that I have with the structure of an ETF in the first place. They are really speculation vehicles. They are convenient and electronic. They depend on electronic markets, and liquidity.”

    The electronics is a convenience. Perhaps you may be able to get a share certificate instead. Poor liquidity of an asset means that it is difficult or slow to convert to money. If bullion can be converted then large users can take away a creation unit of bullion, and if there are no takers for the small users sell their shares, a small discount will appear, large users will buy up a creation unit and take away their gold.

    Speculation vehicle? What does this really mean? If you buy any asset with a view to its financial return, as opposed to consuming it, are you not speculating? if you buy gold bullion you are speculating, are you not? What’s wrong with speculators?

    S2R1 – please re-read and tell us what the real problem is with my gold ETF.

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  • paolo88888.

    I take your points.

    In the end, ownership of all assets have risks.
    Gold has a risk whether it is burried in your garden or in a Vault in Zurich.

    My only advice is to own gold and gold stocks in as many varieties as you can handle.

    For gold stocks
    Different counties for mine locations
    Different brokerage companies in different countries
    Electronic/paper shares (if possible)
    Juniors v large caps

    For gold
    Different ETFs
    Different vaults
    Different countries
    Different gardens (for burrying)
    Different coins

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