GOLD: PHYSICAL OR VIRTUAL? Craig R. Smith, SATC
Oct 02, 2003
Yesterday on CNBC the talk was about the new EFT (Exchange
Traded fund) on gold. I guess Wall Street has finally
realized that so many people are getting into gold
that the only way to keep people in the "paper
markets" is to offer them gold in the form of
shares that can be traded electronically.
The concept is that whatever an 1/10 oz. of gold is worth will be the share price. For example, if spot gold is $385, a share of the EFT will be $38.50. If gold drops to $375, a share will trade for $37.50. If gold goes to $400, a share is worth $40.
I find it very interesting that Wall Street is hell bent on making sure that any equity that Americans own must be in some way tied to the NYSE. As they say, imitation is the sincerest form of flattery.
True, many investors will be drawn to the convenience of not needing to take possession or store their gold, however there are also some drawbacks to an EFT gold fund vs. taking physical delivery of gold coins, such as ... the reporting of capital gains for taxes ... trading fees ... and the lack of privacy of ownership.
Perhaps the greatest drawback is that paper is paper and gold coins in your hand are not a promise of gold, but rather the real thing. Whenever you are dependent on an exchange fund or a company's solvency to maintain liquidity, you have another layer of risk.
Physical ownership of gold alone allows you the opportunity to have 100% ownership and 100% control of your gold assets without a single worry that your EFT gold is also someone elses liability.
Every person in America has the ability to put themself on a personal gold standard by simply purchasing some physical gold. Virtual gold is a great new product I'm sure, but I'm recommending that clients hold physical gold at the foundation of their diversified portfolio.
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