By A.I. Miguel

 

There are many potential worries in today’s financial markets, economy and political landscape.  Whether used for an inflation hedge, an investment, or speculation, many people are now looking to acquire precious metals, specifically gold and silver.  Before going to your local coin or metals dealer, keep in mind there are disadvantages in physical ownership versus electronic book-entry ownership. 

 

Physical ownership:

Whether held in bars, coins, jewelry, or other means, physical ownership can be uneconomical and possibly risky.

When initially acquiring the metal, there could be a sizable retail mark-up that must be paid.  (The local coin/metal dealer is in business to make money.)

Once you own the physical metal, take note of the following…

·          There could be a storage/maintenance fees if stored off outside your home.

·          There is also risk of theft, which could possibly be countered by insurance, but that also is an additional cost.

Once you are finally ready to sell the metal, note the following…

·         There will likely be a markdown versus the current spot price.

·         Liquidity. Your local coin dealer may be fully stocked in a particular coin and is not buying that issue.  That will force you to spend time and effort in the search for a new buyer.

 

Electronic book-entry form:

In the United States, there are approximately 6 gold/silver/precious metal choices in electronic book-entry form.  These choices are in the form of an exchange traded fund (etf). Compared to physical ownership, the acquisition, storage (holding), and disposition of etfs is relatively easy.

The two most popular etfs are:

  • SPDR Gold Shares (symbol GLD).  This is a grantor trust that tracks the price of gold bullion. 1 share represents 1/10th ounce of the metal.
  • iShares Silver Trust (symbol SLV).  This grantor trust tracks the price of silver (London Silver Fix). 1 share represents 1 ounce of the metal.

The four others include:

  • iShares Comex Gold Trust (symbol IAU)
  • PowerShares DB Gold Fund (DGL)
  • PowerShares DB Precious Metals Fund (DBP)
  • PowerShares DB Silver Fund (DBS)

 

In order to acquire an etf, one should consider opening an account with a discount stock broker.  The transaction fee to purchase an etf typically costs around $10, but could vary widely.  If buying only $100 worth of an etf, this may not make sense, but for higher dollar amounts, it is very economical.  For example, on a $10,000 purchase, a $10 transaction fee is only 1/10th of one percent of the principal. 

 

The cost to hold the SLV or GLD etf is also minimal.  The expense ratio charged by the sponsor of the fund is only around ½ of 1 percent.  Brokerage firms typically do not charge maintenance fees if a certain level of activity or account size is maintained. 

 

The SLV and GLD etfs typically have outstanding continuous liquidity, with a typical spread (between the bid and the offer) of only 1-2 cents.  For example, on April 23rd 2009, the GLD was quoted with a bid of $88.93 and offered at $88.94.  What this means is that an investor can place an order to buy at market and obtain a share of GLD for $88.94.  If an investor chooses to sell at market, he will get $88.93 per share.

 

Please note, the author does not recommend the purchase of this or any other asset class, and is in not affiliated with PowerShares, iShares, or SPDR funds. The sole purpose of this article is to inform the reader about the advantages of owning a precious metals etf, and the disadvantages of physical ownership.  Liquidity for etfs vary. 

Before making a purchase or sale on any asset, please take the time necessary for thorough research. You may obtain more information, including a prospectus, about an etf from the respective sponsor:

SPDR ETFs: https://www.spdrs.com/

iShares: http://us.ishares.com/home.htm

PowerShares DB Commodity Services ETFs: http://www.dbfunds.db.com/