Gold in the Modern Age, Part 2

 Last week, you learned about how and where to buy physical gold and silver. This week, it's all about "intangible" forms of gold. [This article was originally published in the International Speculator of 12/2004.]

Physical Gold Substitutes

While you'll always want to keep some physical gold close to hand, there have been a number of relatively recent innovations that allow you to hold gold electronically. The advantages are considerable: By avoiding the need to deal with the metal physically, you greatly reduce the hassle, and it becomes considerably easier to buy and sell. And that's just for starters. Here's a quick rundown of the modern ways to own gold.

Perth Mint Certificates

Perth Mint Certificates (PMCs) are certificates issued by the Western Australian government-owned Perth Mint showing ownership of "X" ounces of gold, silver, or platinum, stored at the Perth Mint. Your PMCs come with government guarantee that has an S&P triple-A rating. So PMCs are "as safe as government bonds"--safer, actually, as the bullion is insured against all risks related to fraud and theft by Lloyd's of London. Another significant benefit is that PMCs internationalize your assets into a solid holding in a stable country, Australia, outside of the U.S.

Should you choose, you can show up at the Perth Mint to redeem your certificate. Not only that, but there are no storage fees for unsegregated metal and, while not negotiable, the certificates are transferable. The most experienced authorized dealer in the U.S. is our friend Michael Checkan, at Asset Strategies International (www.assetstrategies.com). The Perth Mint does charge $50 to issue or reissue the certificates, and the authorized dealers charge their own fees--2% for you to buy and 1% to sell, in ASI's case. If you want to put $10,000 or more into one of the most secure and convenient forms of gold, silver, or platinum ownership available, contact ASI at: 800-831-0007 or email to [email protected].

What about E-Gold?

There are various forms of electronic gold ownership, but the blue ribbon in the category goes to GoldMoney.com. GoldMoney gives you the convenience of being able to set up an account and transact online at low cost and in amounts both small and large. Creating a GoldMoney account is free, and you can use GoldMoney.com to buy, sell and store your precious metals, as well as to transact e-commerce--and you can do it all 24/7.

Your gold ownership is assured by independent audits, secured in a top-rated bullion vault in London and insured by Lloyd's of London. There is a very modest account fee of 0.1 grams of gold per month, regardless of the amount of your holding, if you have any gold in your account. There is no minimum or maximum account balance requirement, but obviously, the more you have, the better the deal. There is also an e-commerce fee of 1% each time you make a payment, with a maximum fee of 0.1 grams, and a minimum fee of 0.01 grams. As for buying gold into your account, there is an exchange spread of 1.39% to 2.99% over spot, depending upon the size of the purchase. GoldMoney buys at spot.

Exchange Traded Funds

In November 2004, the long-awaited Exchange Traded Funds (ETF) finally debuted. The big idea of the ETFs is to offer investors gold in an electronically tradable format, one that is operationally structured so that it can be traded using the same systems that support typical securities trades.

To create the offering, the organizers created a publicly traded company (StreetTracks Gold Shares ? GLD.N), whose NYSE-traded shares convey ownership of 1/10 of an ounce of gold. This, according to the World Gold Council (WGC), the nonprofit organization that sponsored the project, allows the average investor to take a position in gold, through a familiar trading mechanism, and without having to arrange storage, etc. The program was plagued with problems and delays, due in no small part to many WGC-supporting bullion dealers who were suspicious of what looked like a project to compete with them.

In the end, the objections were dealt with and the gold ETF became a reality on November 18, 2004, some two years late. The market seemed to respond well, however, with some 6 million shares traded on that day, and 31 million shares outstanding after five days of sales (representing 3.1 million ounces of gold). WGC says their ETF will triple the market for physical gold in a year. Don't get too excited yet, though: some experts warn that the early buying could be largely due to pre-arranged commitments. It will take about six months for the thing to truly shake out, and show clearly if the marketplace really is accepting this form of gold ownership.

[Ed. Note: GLD shares seem to have closely followed the gold price-- with sharp dips in January and February and subsequently climbing to a peak of $47.39 on 10/11/05. At the time of this writing, GLD.N trades at $45.86, with 120,000,000 shares outstanding. Money CNN.com reported that "within weeks after launch, StreetTracks amassed $1.5 billion in assets." Soon after, Barclays entered the market with its gold ETF, the iShares Comex Gold Trust, currently trading at $45.97.]

Another good option is the Central Fund of Canada, Ltd (CEF.A, http://www.centralfund.com). This is a Canadian ETF, established way back in 1961, traded on both the Toronto Stock Exchange and AMEX. They've being doing it right, too: as of their most current financials, CEF is holding almost 300,000 ounces of gold and almost 15 million ounces of silver.

[Ed. Note: Today, less than one year later, CEF holds 619,000 ounces of gold and nearly 31 million ounces of silver.]

You can see their shares tracking the recent increases in the price of gold on AMEX. CEF bullion is stored, fully segregated, in the underground vaults of the Canadian Imperial Bank of Commerce, one of the largest banks in North America. The bank can only release physical bullion holdings upon receipt of an authorizing resolution of CEF's Board of Directors. The physical gold and silver bullion holdings are insured against destruction, disappearance or "wrongful abstraction."

The bullion and bank vault security are inspected twice annually by CEF, in the presence of external auditors and bank personnel. CEF is considered so secure by Canadians, they can even include shares in their retirement accounts. Best of all, and unlike GLD, CEF does not charge fees, so your holding is not subject to any dwindling. The Central Fund is a bit of a sleeper, but who needs fancy? It's convenient, cheap, and solid.

A Gold Bug's Conclusion

As history has demonstrated on numerous occasions, everyone should have some modest amount of physical gold in close proximity. We have also long recommended keeping a few bags of pre-1966 U.S. silver coins in the basement. However, time and innovation march forward, and so it increasingly makes sense to explore some of the electronic options discussed in this article. Regardless of how you hold your physical gold, the key thing is to hold it. That alone will place you well ahead of the crowd as the dollar hegemony comes to an end.

 

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As we see in the case of the gold EFTs, Doug's instinct when it comes to precious metals--in physical form or stocks--hasn't let him down yet. A fact the subscribers of his International Speculator are more than grateful for.

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Posted 10-25-2005 12:27 AM by Doug Casey