Market Uncertainty Means Buy Gold, But Bullion or Shares in a Gold ETF?

February 18, 2012 | By More

Uncertainty in our financial markets is quickly becoming the new definition of “normal” in this era of globalization, driven primarily by the never-ending debt discussions in Europe.  We are already into the third year of this “imminent” crisis with no definite time period cut in stone for a workable solution.

The ongoing drama is so pervasive that a ripple effect constantly takes place in all security, commodity, and currency markets whenever any rumor or murmuring from a European official emanates from across the Atlantic.  For traders that look to volatility for opportunity, they, too, have been “whipsawed” back and forth, more frenetically than even they can withstand.

The latest news is to create bridge loans for Greece to prevent default before national elections, as if that delaying tactic has any true market value.  The general consensus of market experts is that papering over a debt crisis by issuing more debt is akin to throwing gasoline on a grease fire – it will not work, even in the short term.

Under these unusual circumstances, what is a prudent investor to do?  For those in the know, the correct answer to the previous question is to follow closely the commodities sector for entrance opportunities.  The preferred leader in this category is undisputed.  It is Gold.  Supplies are limited, but demand is up, especially in India and China.  Add to this that inflation will rise with a recovery.  Central bankers will have to consider raising interest rates ahead of published forecasts, another boon for Gold owners.

The question then becomes should an investor own physical bullion or shares in a Gold ETF, assuming that investing in the mining industry directly involves more risk than you might want?  This question stirs up an age-old debate about the safety of owning physical bullion in a vault or in a safety deposit box versus the convenience of transacting business online with your stockbroker.

The main physical bullion marketplace for the world is in London, where trades in the “London Good Delivery” Gold bullion bar are transacted daily.  This bar is 12.4 kilograms, nearly $800 thousand of the metal, and must conform to a series of strict purity and assay standards, maintained within a confined group of refiners, vault managers, and courier providers.

These Gold bars are not something that public buyers can access.  Individual investors, however, can deal directly with specialized bullion vault companies that actually inventory and own the actual bars.  Low commission and storage rates will apply, but these fees tend to equate with other options for owning the yellow metal.  Investors can also buy smaller ingots or coins from local dealers, but commissions and fees in this arena can be substantial when it comes time to sell.

Investors looking for ease of purchasing and selling tend to favor trading shares in any one of the popular Gold Exchange-Traded Funds (“ETFs”).  Most ETFs, however, deal in the futures market, a “paper” security market that does not participate in direct physical Gold ownership.

For Gold purists that fear bank failures and the potential for loss in these funds, owning “paper” shares in a fund is tantamount to owning worthless “paper” currency.  These investors contend that the hurdles required to sell physical bullion are good things.  The difficulty in selling actually protects the owner by extending his period of ownership.  Most traders will admit that their emotions have resulted in many ETF sales of Gold that they wish they could reverse.  Average investors tend to sell much too early, especially if it only takes a click of a “mouse”.

Tom Cleveland from examines the owning of bullion versus having shares in an ETF like “GLD” debate, with a 2012 perspective in the article above..

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