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My Real Objection to 'Paper' GoldBy
Monday, August 10, 2009
I myself have not bought and would not buy any of the exchange-traded "paper" gold: GLD, GTU, CEF, or any others.
I prefer to only own actual metals. I have mentioned these products as a courtesy to readers, but sometimes I wish I never had gone down that route at all. There are potential drawbacks to all of these products... There have been questions raised about how the holders of GLD treat their gold. Some have charged that they loan it out to central banks for them to short the gold market. There have also been questions about how the metals are held. I prefer not to even have to worry about these issues, so I would not buy GLD. As for GTU and CEF, they pledge to hold actual metals and not lend them out. However, as these are closed-end funds, you can end up paying a premium over the net asset value. Sometimes this premium can be quite high. And I see no reason at all to buy CEF, the Central Fund of Canada. As I write, the premium over metal value is 13%. Further, CEF is a mix of gold and silver. You are better off just buying the metals themselves. Even if you are intent upon buying "paper" metals, instead of buying CEF, you will probably be better off buying your preferred mix of gold in the form of either GTU or GLD and silver through SLV or one of the other ETFs. As for using covered calls – where you sell call options against your shares in GLD or another metal ETF – I have never done this. If you are happy using this strategy, go ahead. You are using a derivative anyway when you buy either GLD or GTU, and using covered calls adds yet another derivative. I simply stay away from derivatives and prefer to own the actual asset. Derivatives have caused big problems in the recent past, and will continue to in the future. I would want to steer investors away from any but physical gold held in your name. This goes to the very heart of good investing. In my experience, I believe that it is the hardest thing in the world for any investor to first identify a bull market in an asset, take a position in it, and then hold on until near the end of that bull market. Most people, of course, don't enter into a bull market until it is well underway. But it is also true that most people do not have the patience to simply hold that asset during all of the inevitable corrections and dull periods that take place during the course of a bull market. These bull markets can last for 20 years, more or less. In urging readers to shun paper gold products that can be sold quickly, I am trying to get them to stay in the bull market and not sell out too soon. Too often, once they sell or trade themselves out, they don't get back in, except maybe at a vastly higher price. If you own your own physical gold in a way that makes it hard for you to sell, it is obviously easier to stay the course of the entire bull cycle. I get a lot of questions about how best to sell gold. The people who ask them will most likely not reap the full benefits of the bull market. Let's say that gold will continue to correct for another year or so, and drop further. If they are holding GLD or even GTU, it is very easy for them to call their bank or broker and sell out. But if they have the actual asset, either near at hand or in a safe vault far from home, it is not so easy to sell at a whim, or in a moment of temporary fear. So that's really my advice: hold your metals in such a way that makes it both the easiest for you to forget that you have them, and hardest for you to quickly dump them. Good investing, Chris Weber Editor's note: Chris Weber is one of the best investors we know, period. He started investing at age 16 and made so much money, he's never had a "real" job in his life. The fact is, we've never seen him wrong about a major market call. For Chris' favorite currency and gold recommendations – where he's putting his own money today – click here.
Further Reading:
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