A Deep Gold Question

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A Deep Gold Question

A friend asked me for my thoughts on buying gold via a number of funds, some of which have physical gold redemption features. Here’s what I shared with her, it might be interesting…

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If it’s trading at a discount, then it’s “on sale”, but you have to look at the total cost of acquisition and the form your delivery will take. Buried in the fine print might be delays in delivery (time is money, after all), shipping and delivery fees, the cost of insurance during shipment, etc. There could be a lot of hidden costs and it could consume a lot of time. Unless you are going to move $5-10 million into this kind of asset, it might be cheaper and less hassle to call Hannes Tulving or another gold dealer, pay the fees and get it that way.

The other “cost” is what you are actually buying. If you are getting a “good delivery bar”, that will require an assay. For a large sized bar, I’d definitely drill it, too, to be sure it’s not tungsten inside or use some other non-destructive test (sonic). Reselling non-standard bars that enter physical possession outside the secure vaulting system can be problematic. That’s why I sold nearly all our bars several years ago and focused on coins.

Additionally, coins that are legal tender have the other advantages in places with high VAT like Iceland, there’s no VAT on “legal tender currency”, so they are potentially easier to ship around and bring in and out of many jurisdictions. Bars get taxed in many jurisdictions. The other thing to look at is coins that circulate (American Eagle = 22K or 91.67%, copper and some silver mixed in to “harden” the coin for circulation) vs. bullion (Canadian Maple Leaf = .99.99% pure).

There are tax and import advantages for bullion in some jurisdictions, i.e. Singapore and other parts of Asia, so you’ll want to look at that, as well. If things really go to hell, things could circulate for a bit, otherwise, it might be best to put the coins in a vault somewhere and use the gold for collateral to borrow against. Coins could also be “spent” in the future, and if they are legal tender, you might be able to avoid capital gains tax since you are just “spending” the money you already paid for. Certain tax authorities might have a different understanding of this issue, check with your accountant.

From the tone of your question, it seems to me that you guys are now moving away from the paper / electronic forms of gold ownership to physical ownership, which implies a need to get out of the banks to protect assets.

The main value of gold is as a store of value that’s outside the financial system. That’s it. It doesn’t pay interest and gold just sits there like dead money as Warren Buffett famously said. However, there comes a time when everything else will be taking a haircut from bailins, i.e. the IMF’s proposed 25-30% “wealth tax”, currency and banking failures, where you could be treated as an unsecured creditor (as a depositor) and get nothing or pennies on the dollar back. Some asset classes will get crushed and people could have serious liquidity problems, i.e. how will real estate be treated? Not to mention the illegality of the whole thing….not that legal matters will get in the way of a good “crisis”. Governments will take whatever they need to keep running, never mind the real source of the problem. You’ll want to cover your bets a number of ways, it seems to me.

Forewarned is forearmed.