Monday, 5 May 2014

Gold Bullion Investing Online: How the alternatives compare

When we delved into the workings of the Permanent Portfolio over the last two weeks, we saw that one of the four component holdings was gold. Whether it is to implement the PP, or merely to have a smaller gold holding within a portfolio, there are different ways to own gold. A desire to manage investments online to facilitate tracking and rebalancing means that certain alternatives work better in terms of cost and convenience than others. Let's have a look.

Some not-quite-adequate choices ...

Jewelry
Purity of the gold and difficulty of selling for anything near the actual gold value to rebalance a portfolio, let alone doing it online, mean that this is not really investment alternative, more a consumption item.

Coins
The Canadian Mint sells gold coins of assured purity of at least 99.5% gold, which is the level the Canada Revenue Agency says qualifies as a financial instrument and thus can be considered an investment. However, the problem is partly the cost of safe storage, possibly a safety deposit box and extra insurance, and partly the trouble of selling if necessary for rebalancing. A big problem is that many online brokers will not accept gold coins within registered accounts, though it is legal (see TaxTips.ca's list of qualified investments).

Shares of Gold Mining Companies
Though there are many publicly-traded shares of gold miners that rise and fall with the price of gold and ETFs that hold baskets of the shares of such companies, there are other business factors at play that disconnect too much from the pure exposure to gold price movements.

Futures
These contracts to take delivery of gold at a future date do provide direct exposure to the daily price movements of gold but they are not very practical for an individual investor, as David Parkinson explained in his Globe and Mail article The facts, fears and flaws of buying gold, which adds excellent detail on other alternatives too.

More practical alternatives ...

The other methods of owning physical gold bullion, such as the Permanent Portfolio proposes, compared in our table below, include:


Bars

You can own gold bars in various subtly different ways, the surest being a holding where the gold is allocated i.e. in a secure vault with your name on a serial-numbered bar that cannot be touched without your permission. Some brokers will sell such gold in jointly-held unallocated form. The trade-off is that the allocated gold will probably incur an annual storage cost while the unallocated may not. You can most often take delivery of the gold bars but then it obviously cannot stay in a registered account. Plus, as the Parkinson article points out, once out of the official gold tracking system to sell it the gold would have to be melted down again and checked for purity, which entails cost. An example of an online broker's offering is that of BMO InvestorLine. There are also companies specializing in low-cost, offshore purchases and/or sales and storage, such as BullionVault.com. Blogger Chris Martenson lists half a dozen others on Peak Prosperity. They typically emphasize that they only offer allocated gold, they quote low bid-ask spreads for buying and selling and low fees for storage, lower even than ETF annual fees. A downside for a Canadian is that accounts with these firms will be taxable only, i.e. cannot be registered - RRSP, TFSA LIRA etc.

Certificates
These securities are claims against physical gold held in vaults of a bank, which can be exchanged for delivery (again with de-registration consequence). The bank most often owns the gold (it is not allocated) and in the event of the bank going bust, the investor may not get gold or money back.  The good thing is that once purchased, there is no storage cost. Rebalancing trades in portfolio are possible, though lumpy, being in minimum 1 oz size (i.e. around $1400 Canadian nowadays). An example is Scotia McLeod's offering.

ETFs, Mutual Funds and Closed-End Funds
There are many gold funds but not many that hold 100% or nearly so, only physical gold bullion. Trading costs and annual fees differ slightly amongst ETFs and CEFs, while mutual funds have significantly higher annual fees. All offer easy and cheap online portfolio management tracking and rebalancing. We should note that even for the pure gold physical bullion funds, some hyper-vigilant gold investors perceive serious institutional risk, for example, Jeff Nielson of Bullion Bulls Canada's The Seven Sins of GLD, a detailed criticism of the world's largest gold bullion ETF by far, SPDR Gold Trust (NYSE: GLD) MER 0.4%.

ETFdb lists GLD and the three other US-traded gold bullion ETFs available to Canadian investors.

a) Canadian ETFs
iShares Gold Trust (TSX: IGT, which is actually a cross-listing of the US-based ETF with ticker IAU) MER 0.25%
iShares Gold Bullion ETF (CGL as a CAD-hedged version and CGL.C as an unhedged version) MER 0.50%

b) Mutual Funds
There is a handful of gold bullion funds found in a GlobeInvestor search.

c) Closed-End Funds
Two leading funds with attractive low on-going costs are:
Sprott Physical Gold Trust (TSX: PHY.U and cross-listed on NYSE: PHYS) - MER 0.42%
Central Gold Trust (CAD: GTU.UN / USD: GTU.U) - MER 0.36% This latter fund even skeptical Mr Nielson finds acceptable. It only holds physical gold yet was trading at a 3.7% discount (in CAD and 2.1% in USD) to its holdings as of 2nd May - a bargain!

Taxation
Gold is a commodity that does not generate income so the above holdings will not have annual distributions, or very rarely so - GTU.UN has not needed to distribute any income since its launch in 2003. An investor who holds these gold investments in a non-registered taxable account can choose whether trade profits or losses will be treated as income or capital gains/losses, as accountant Jamie Golombek explained a few years back in the Financial Post. For most investors, unless gold is bought with borrowed funds and it is important to write off interest expenses (which is a very risky investing strategy), the lower taxation of capital gains at half the rate of income would normally suggest choosing treatment as capital gains. For someone with a PP portfolio and the gold in a taxable account , the drastic price swings will surely make for a rebalancing sale or a purchase most years, but capital losses can be carried forward to offset later gains so there might not be much tax to pay over the long run.

Mix and match possibilities
Of course, to structure a portfolio it is not necessary to hold all gold assets in the same fund or type of holding. A base holding in gold bars that is unlikely to be touched by rebalancing can be combined with a an easily traded fund holding that can accomplish rebalancing.

Other Resources:
Gold industry primer - in the first pages of IAU's prospectus
Gold as an investment - on Wikipedia

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

4 comments:

Anonymous said...

Thanks for your article. You should also add the ETR (i.e.: Symbol: MNT) from The Royal Canadian Mint in your analysis.

Cristian said...

I have a few comments I would like to add:
1) Gold coins: the Canadian Mint sells (as far as I could find) only limited mintage coins, which are very expensive. For example, a 33.17 g gold coin of 99.999% purity sells for $2,999.95, while a 1oz (31.103g) gold coin of similar purity sells for $1463 on Kitco. More practical choices for buying regular gold coins would be:
- Kitco - usually best prices, you can also sell back to them
- www.bordergold.com - the also sell and buy
- canadianbullionservices.com - they provide RRSP and TFSA accounts
- ScotiaMocatta and CIBC Gold Services - sell and buy, more expensive than the previous alternatives
Cost of storage in a bank safe deposit box is minimal (for example $45/year for the smallest box at Scotiabank, cheaper than the 0.5% commission for an ETF if the gold investment is above $9000.
For example, investing $50,000 in a gold ETF would cost you $250/year, while holding the physical coins in a bank safe deposit box would cost you $45/year.
2) About other more practical alternatives:
- gold bars: valid alternative to coins, a little bit cheaper to buy, same price to hold
- certificates – means trusting the bank to hold the gold on your behalf. Bank goes bust? You lost your gold. Browne recommended holding physical gold, exactly in order to avoid such things.
- ETFs – convenient but expensive alternatives for holding larger amounts of gold (above $9000). Bid/ask spread: 2.37% for IGT, 0.32% for CGL on 10 May 2014.
- Mutual funds – even more expensive
- Closed-end funds – still expensive
Conclusion: Gold coins or 1oz bars are the cheapest alternatives, especially for larger investments and especially when investing long-term (which is the point of the Permanent Portfolio). They are relatively easy to rebalance as there are several buyers available in Canada.

Johnny Ancich said...

You missed MNT (Royal Canadian Mint ETR). Same as an ETF, but the gold is stored at the mint.

Ray said...

You do not need to invest in gold, you can invest in silver, for example, or platinum. Casey Research and GoldSilverWorlds have good articles about that (http://casey.zendesk.com/attachments/token/leufAbNpXlcBE4zLNewaai7zU/?name=ThreeBestWaysSilver.pdf and http://goldsilverworlds.com/investing/how-to-invest-in-buy-sell-store-and-insure-precious-metals-in-canada/)