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The long anticipated launch of GLD – the first gold-backed Exchange Traded Fund in America – came to end yesterday. The fund took in an impressive $550 million on its first day of trading, creating a minor buzz. (NYSE ~ G&M ~ TSC ~ CBSM). As for the future of GLD, Ned Schmidt, editor of the Value View Gold Report, said it best: "investment advisers will no longer have a viable excuse for not having gold in a client's portfolio”.
Notwithstanding how beneficial GLD could be to the future price of gold – “the
logistics of buying, storing and insuring gold have constituted a barrier to entry for some institutional investors” (Prospectus pg. 28) – there are pitfalls when buying GLD that are worth considering. Below are some of the pros and cons of owning GLD versus physical gold.
Pros
1) “The Sponsor expects that, for many investors, costs associated with buying and selling the Shares in the secondary market and the payment of the Trust’s ongoing expenses will be lower than the costs associated with buying and selling gold bullion and storing and insuring gold bullion in a traditional allocated gold bullion account.” Pg 2.
2) Options may soon be available on GLD. This would allow smaller investors – which have no alternative but to hold their psychical gold - to hedge their gold stake using derivatives.
3) GLD is margin eligible while coin/bullion salesmen like to be paid in full at the time of sale.
Cons
1) You need to own 100,000 GLD units (equivalent to 10,000 ounces of gold) if you ever want to see your gold.
2) Buying physical gold and placing it in a safety deposit box may be cheaper than owning GLD (0.4% annual expenses).
3) Market forces could make buying GLD more expensive than buying physical gold (see NAV, or ‘premium/discount’ on GLD website).
4) GLD is taxed as “collectible" by the IRS, and is thus subject to a 28% maximum tax rate on long-term capital gains. Physical gold can be purchased/sold with less of a paper trail (so I am told).
5) GLD’s gold is not insured (pg. 11).
These are some of the pros and cons of owning GLD versus psychical gold. Exposure to gold can also be acquired in the futures market, and gold stocks.
Futures Market
GLD trades at different hours than the futures market and has no expiration/rollover date. Futures give the investor more leverage. GLD options are not trading yet.
Gold Stocks
Gold stocks carry company to company risks/rewards while the price of GLD is, essentially, influenced only by the price of gold.
Conclusions
When options begin trading on GLD the advantages of owning the Trust over owning the hard metal for smaller investors will become more apparent. For example, say gold quickly rallies above $500 an ounce and you are thinking of taking a drive to get your gold to sell it. Not only would this take time and effort – not to mention the decision of what to do with the money when you sell it – but it would also prevent you from profiting from any further rally in gold. By way of comparison, if gold rallies to $500 an ounce and you own GLD you could (again, when/if the options begin trading) hedge your position by writing covered calls or buying put options.
In short, GLD is good news for gold investors because it provides them with investment alternatives. And while it may be wishful thinking to conclude that GLD will ever become popular enough to dictate prices in the gold (futures) market, it is worth remembering that the trust is only 1-day old. With the U.S. dollar threatening to decline further in the months and years ahead, don’t be surprised if today’s minor buzz turns into something more; don’t be surprised if GLD (and/or Barclays upcoming listing) becomes the ‘safe haven’ choice for dollar bears.
Schmidt said it best: "investment advisers will no longer have a viable excuse for not having gold in a client's portfolio”.
Disclosure: Todd and I own gold coins/bullion. We would consider purchasing GLD (or CEF) on weakness and or NAV changes.
http://www.streettracksgoldshares.com/
http://www.streettracksgoldshares.com/pdf/streetTRACKS.pdf
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