by James Anderson, Strategic Wealth Protection:
The case for owning precious metals has already been made. We live in a world of unprecedented and ever expanding debt, devaluing fiat currencies and negative interest rates. Even Wall Street’s heralded “Bond King”, Bill Gross, now admits the world will continue to have difficulty paying its debts without further price inflations.
Investors wisely seeking exposure to precious metals must deliberate between the convenience of buying shares of an electronically traded fund (ETF) and the ultimate security of owning physical gold and silver bullion. We tasked ourselves to take a closer look at each to understand their important distinctions.
Firstly, let’s define these two different investment vehicles for the sake of clarity:
Bullion – (n) physical precious metal in a bar, coin, or round form almost entirely valued by its market or melt value alone.
ETF – (n) exchange traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities (e.g. gold), or bonds, and trades close to its net asset value over the course of the trading day.
Which is a better vehicle for silver and gold investors?
One is more convenient for short-term trading (ETF). The other is a proven bedrock safe haven you own and control directly (physical bullion). Your preference will likely be determined by your investing time horizon and world view.
For short-term traders, over the last ten years or so, precious metal ETFs have become a simple way to gain price exposure to gold, silver, palladium, and platinum’s futures spot price.
The world’s largest gold ETF (symbol: GLD) was launched at the end of 2004 while silver’s largest ETF (symbol:SLV) was launched in 2006. These and all other precious metal ETFs, mutual funds, transparent bullion depositories, and futures exchanges combine for a total market capitalization of about $150 billion USD today. That’s just a little less value than the entire world’s gold mining supply per year.
Today if you were to ask a trusted financial advisor or institution to have a portion of your investment portfolio allocated to precious metals, chances are very high they will attempt to steer you into the realm of either ETFs or precious metal mutual funds.
I suppose the biggest reasons for this is that we (1) live in a world of increasing over-financialization and (2) precious metal derivatives and paper asset proxies keep investors within a financial professional’s fee matrix. In other words, if an investor were to withdraw some funds for an outright purchase of physical bullion they would be escaping future fees of financial advisors, institutions, and other interests involved (mainstream financial media outlets, custodians, sub-custodians, etc).
Physical bullion on the other hand, can be conveniently bought outright, owned and held first hand completely unencumbered from price tracking promises or liability exonerating 40+ page prospectuses which generally govern the terms and conditions of an ETF.
Being that ETFs are particularly vulnerable to mis-pricing, their prospectuses are usually infused with convoluted clauses allowing them to operate in spite of significant price divergences from the underlying assets they intend to track.
Their prized liquidity is limited to market trading hours, a mere 6.5 trading hours, 5 days a week, holidays excluded. ETF investors are further exposed to overnight risks such as stock market trading halts, bank holidays, and financial market meltdowns that heavily hamper their high liquidity posing.
Physical bullion could go supernova in both price and value, yet ETF proxies could deflate or possibly go bankrupt. All long term investors with exposure to exchange traded funds should reexamine the inherent risks associated with these investment vehicles.
For many years now, central banks and eastern government regimes have been actively buying physical gold bullion outright. Sovereign government actions are generally guided by longer term perspectives. More and more individual investors are also acting as their very own central banks, by literally also taking these precious matters into their own hands.
Physical bullion bar, coin, and round demand has persistently increased every year since the 2008 financial crisis. Bullion buyers typically buy and hold for the long haul. These buyers tend to have mid to long-term time horizons and generally have better understandings of the fundamental drivers in this 21st century bullion bull market than retail ETF traders do.
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