November 27, 2022

Should I Buy Gold Bullion or Gold Trust Shares?

Gold trusts have probably been a decisive factor in promoting the ownership of gold and expanding the market to investors who would otherwise not participate in the market. Prior to the establishment of the gold trusts, investors had two primary options for investing in gold, both of which had drawbacks. Gold investors could purchase the shares of gold mining companies or physically purchase gold coins or bars.

The problem with investing in gold stocks or gold mutual funds is that the investment returns may under perform the appreciation in gold bullion. Many gold stocks have vastly underperformed the price appreciation of gold bullion due to company specific issues such as ore depletion, foreign expropriation, environmental problems or financial difficulties relating to the huge cost of mine exploration, development and production. Picking the right gold stock was often difficult.

Physically purchasing gold coins or bullion presents another wide array of problems and costs. Finding a conveniently located and reputable gold bullion dealer takes time and usually entails a trip to the dealer for every transaction consummated. Liquidity is an issue as well since the physical gold would have to be physically transported or shipped to a dealer prior to receiving sales proceeds. Transactions costs on each side of the trade can easily exceed 5%.  Physically holding gold is expensive due to security, storage, transportation and insurance costs.   Gold coins or bullion can also be lost or stolen, the ultimate nightmare for an investor.

Investment in gold share trusts eliminates all of the problems associated with stock selection and physically holding gold. Shares representing an interest in gold can be sold at any time throughout the trading day at market prices.   Investor ownership of gold trust shares represents an undivided, fractional interest in physical gold held by the trust.

Gold share trusts have become extremely popular with investors due to the advantages of owning gold via gold trust shares.  Investors have poured over $57 billion into two of the largest gold share trusts, the SPDR Gold Shares Trust (GLD) and the Sprott Physical Gold Trust (PHYS).

As gold prices continue to increase, the gold share trusts are likely to be the investment of choice for many investors seeking to establish or increase an investment in gold.

Gold and Silver: Investment Differences

Gold just had an amazing year, in which it reached a new all time high, rising about 25%. Silver provided an even more stellar performance, with a gain of about 75% and counting. It’s no wonder then, that more and more investors are becoming interested in the potential offered by silver.

One of the most pronounced differences between gold and silver is the price per ounce. Gold is currently around $1,400 per ounce, while silver is at $30. The difference has not always been so large.

The gold-silver ratio, or the number of ounces of silver it takes to buy one ounce of gold, is currently around 47:1. Historically, this ratio has been around 16:1, which closely corresponds to the ratio of gold to silver within the earth’s crust. Thus on an absolute basis, the difference in price is justified, but not to such a degree as current prices have suggest.

Another key difference between gold and silver is the price volatility. While gold has enjoyed a string of ten straight years of annual gains, silver’s price performance has not been as constant. Some years have been downright disastrous, such as the 27% drop silver experienced during 2008. From the start of the year to the low, silver had experienced a decline of nearly 40%. During 2008, gold had booked a 4.32% gain, with a maximum decline of 14.54% from the start of the year.

Finally, while gold and silver are both metals that store value, silver has been long served as an industrial metal. The recent case for gold demand has been as a hedge against inflation or a safe harbor from fiat currencies. Demand from these factors has offset declines in demand from gold jewelry, which has historically been the predominant source of demand. Silver, on the other hand, can serve in a dual capacity, with possible appreciation in value in times of both economic distress and prosperity.

Silver’s roles may be expanding once again, as it is starting to be utilized for its antibacterial qualities.

With an impressive year nearly in the books, the story for silver seems hardly over. Next year might be telling as to whether silver will continue to make progress in catching up with the historic ratios and start to challenge the label of “poor man’s gold.”

Which is Better to Own – Gold Bullion or Gold Stocks?

Gold investors have two basic choices – buying gold bullion or buying shares in companies that produce or own gold. As we examine the two basic investment vehicles available to gold investors, it becomes apparent that choosing the best investment option can be a complex decision. Some of the questions that a gold investor should consider include the following.

What has produced better investment results – owning gold bullion or a gold mutual fund?

To gain insight into investment returns, let’s compare how an investment in gold bullion compared to investing in the Tocqueville Gold Fund (TGLDX).  I selected TGLDX since it is one of the best performing, actively managed gold funds with a long term track record.  An investment of $10,000 in the Tocqueville Gold Fund in 2000 would now be worth approximately $86,000 for a stunning return of 860%.   A $10,000 investment in gold bullion in 2000 would currently be worth approximately $46,400 or a 467% return.

Since gold mining companies are leveraged to the price movement of gold, it is not entirely surprising that the gold stocks would outperform the metal. Leverage, however, works both ways and in 2008, when gold experienced a price correction, TGLDX dropped from 65 to 19, a horrendous decline of 71%, whereas gold bullion experienced a normal bull market correction of only approximately 25%.   For those investors unwilling to tolerate huge price fluctuations, bullion seems a better way to go. When gold is moving up, expect the gold funds to outperform the metal.  In 2010, TGLDX has increased 42.7% compared to an increase in gold of 27%.

TGLDX Chart : Yahoo Finance

Gold 2000-Present: Kitco

If I decide to invest in gold stocks instead of the bullion, how many different stocks should I buy?

One of the primary tenets of sound investing is to always diversify.   Although selected gold stocks have vastly outperformed the price movement in bullion, many have not and some have dramatically underperformed.   Evaluating the prospects of an individual gold mining company is difficult, even for the experts.  An investor choosing to allocate a large percent of assets into gold stocks is probably better off (from a risk standpoint) investing in a well managed gold fund with a solid long term track record.  For an investor that does not want to hold physical gold nor own individual gold stocks, investment in a gold ETF such as GLD, that tracks the price movement of the bullion, would be an option.

I don’t trust paper assets and want to hold only gold bullion – what are my options?

For a conservative, risk averse investor looking to protect the value of his money,  investing only in gold bullion is a sound strategy.  Holding actual bullion, however raises security questions on how and where to store the physical gold.  Investors who wish to have their gold stored on their behalf can chose from a variety of firms that securely store gold in protected and insured vaults.  For an investor storing gold on his own in a safe deposit box, it would perhaps be wise to diversify storage geographically by using more than one bank.

Is the tax treatment different for gold bullion versus gold stocks?

The IRS considers gold to be a collectible.  Gains on gold bullion or coins and ETF’s backed by physical gold and held for more than a year have a maximum tax rate of 28%, while positions sold in less than a year are taxed at ordinary income rates.   Gold stocks are considered capital assets by the IRS and standard capital gain tax rates apply to profits.

As nations compete with each other to devalue their currencies and the Federal Reserve engages in outright money printing, gold investors should be expecting substantial profits regardless of what investment vehicle is chosen.

Silver ETF Anomalies, National Gold Exchange, Regan Gold and Silver Coins

I’m still catching up after a vacation in Europe. For now here are links to some recommended articles about gold, silver, and precious metals from around the net.

Multiple Anomalies Detected in Silver ETFs

A recently released working paper on statistical and factual anomalies in silver ETFs including internal duplicates, weight duplicates, statistical clustering, and cross-reference duplicates. From the conclusions section: “The only way for all of these anomalies to occur together as noted in this paper, is via systemic fraud or gross accounting error bordering on jaw-dropping incompetence.”

Greenlight Holds Bullion

A $5 billion hedge-fund firm switched its entire holding in the Gold ETF to physical gold bullion. During the first quarter the firm held 4.2 million shares of the SPDR Gold Trust.

New law boosts gold bar sale in South Africa

Until recently it was illegal for South Africans to hold unwrought gold, such as gold in bar form. The law change has sparked a surge in new bullion demand.

National Gold Exchange Inc of Tampa

National Gold Exchange, one of the world’s largest coin wholesalers, has filed for Chapter 11 bankruptcy. The company has more than $50 million in debts.

Catching the Gold Bug

From a few weeks ago. The Wall Street Journal ran this high profile piece on gold investing. Someone interviewed for the article said: “When you’re in uncharted economic waters, people buy gold.”

Ronald Regan Gold and Silver Coins Proposed

Should Ronald Reagan appear on gold and silver commemorative coins? Over the years there have apparently been several proposals to put his likeness on a coin, but none ever gained sufficient support to become law.