What are the pros and cons of buying ETFs over physical bullion? Also, how how would somebody go about purchasing ETFs?
ETF’s are bought and sold through a brokerage account with a firm like e-Trade, Vanguard or Fidelity, just like a common stock, with a modest commission paid to the broker. And that’s the up-side to trading ETF’s – they are liquid. You can buy and sell as often as want. Dozens of times in a single day if you want. The downside to an ETF is that you do not own the underling item…gold, silver, platinum, or whatever…you just own shares in the fund.
ETFs are purchased, sold, and optioned just like any regular stock like GE, AAPL, WFC, etc. Any brokerage account would make it quick and easy. The other part will bring a lot of arguments since what one sees as a "pro", others see as a "con" and visa versa. Some considerations: ETFs can be bought or sold in seconds, whereas physical can not. ETFs can be leveraged 2X,3X times long or short, but you have to know which direction it is moving. I have done both, and there is a time and reason for using each of the 2.
The pros of owning physical bullion are that the bullion will be in your possession in the event of a financial meltdown, nuclear war, confiscation, fraud, etc. If you aren't too worried about those outcomes, ETFs have the advantage in safety of storage, and ease of disposal. If PMs spike higher, you are far more likely to be able to sell the ETF at full price than the physical.
I don't think it is an either/or situation as they serve different purposes. Buy physical for long term holds and independence from the "system". Buy ETFs for relatively short term gains and dips in the market. You can own both at the same time.
IMO i buy ETFs for Silver since storing that large amount of Silver is too expensive. Also the most important thing is you can purchase ETF as part of your Roth IRA account (any gains is tax free). Big drawback of ETF is if there is massive sell off in the market which in term triggering a sell off on the PM etf as hedge funds scramble to raise cash . The firm might not have enough gold or silver on hand to sell and cover the sell off, triggering a panic sell off of the etf. The etf price could fall a lot more than actual price for gold or silver.
You should diversify between physical and ETF's, just as you would investing. I am very bullish when it comes to PM's, especially silver. Conservative investors say that you should maintain about 10% in PM's. Lets say for instance you want to put 50% of your PM investment into silver. I would buy physical up to as much as you feel comfortable with having as a safety net (as stated above, total economic collapse). On the same token, once you cross that barier and it actually becomes a hazard to possess so much physical, then I would move towards ETF'S.
The way that the ETF's trust such as GLD or SLV is written doesn't require immediate sell off of stored gold like with common mutual funds does with stocks. Since only certain participants ( not us type of investors, read JPM, etc. ) can actually move gold in or out, except under large quantity exchanges, the settlement is cash. The ETF issues a number of shares depending on their stored gold or silver. Once the shares are issued, the buying and selling ( thus the profits and losses) are borne by the individual investors owning the shares. Yes, any issued stock can go up or down, but the SLV and GLD ETF doesn't have to take part unless they wish to buy back some stock at a low price ( smart, as it permits them to have a surplus of gold backing the remainder), or if they can purchase physical gold at a lower price due to the drop, they can later issue more stock, and make their own income. The options on ETFs are like options on regular stocks. No precious metal exchanges hands, and the options values are determined by the exchanges "free market". When a person buys stock such as GE or GLD, they do not buy it from the company, they buy it from a seller, maybe like us or maybe a hedge fund, etc. But GE or GLD itself doesn't have to supply money or gold as the stock price rises or falls. When we sell, the company doesn't have to buy it back for a price, a buyer such as me, or a hedge fund has to supply the cash, so the amount of gold in GLD's trust and the number of Jet turbines at GE aren't varied until they decide to issue more stock, or buy back some stock taking it off of the market. yes, there may be a panic sell of of GLD stock on the market, but that doesn't change the amount of gold held. That is a time when the principal backers of GLD would be buying so they can keep the gold they have at lower value. If one really believes in gold, this would be the time of a life to buy. But as others say, it is only paper jim
Far point but how come that is always raised as a major drawback (especially by the gold sellers) of holding ETF over physical asset? Is that belief a myth?
Partly. The Trust documents for SLV and GLD and other etfs are on the web and I am fairly certain that 95% of people who say that have not read them through. The trust is favored towards the principals ( big surprise), but they have to maintain it as written, and the stock is as secure or much more so , since they are backed with physical metal. The price of the stock may go down severely in a correction, and even go far below the POG, but which will drive which? If it did, you could get out in 15 seconds ( at a loss of course) in an ETF. Try to sell physical if the floor is falling. Many say , I am in for the long run, "5, 10, 30 years whatever" to cover such problems rather than admit that they just lost 50%+ of their value, but "it is what it is". The conspiracy theories about precious metals are vast and varied, and if this is one's belief than physical is best. Also if one believes they can cheat on their taxes by using physical and they can live with themselves illegally, physical is best for them also. Like I said, many opinions, but if one is interested in the etfs or if one hates them, read the documents and not a bullion seller.
Good read never really been long on SLV other than trading it here and there to profit from the dips.
Cloud and Jim both touch on a great point, getting out. Every investment you have to wonder how you exit it, and this, (besides physical security), is the major shortcoming of physical ownership. Dealers only pay you a portion of the market, while an ETF will always sell for market value. This is especially important in a falling market, as has been mentioned. I have physically been there in a falling market where dealers were offering HALF market value at best, and other dealers were not buying at any price. If a person wishes to invest more than 5-10% of their portfolio in PM, (a hedge position held long term), then I think this is a HUGE point of concern. I am not saying one is better than the other, as Fatima very fairly pointed out both can be used. I believe this as well. I currently have 5% approximately in PM, and if I were to increase that position would definitely wish to look at these ETF's for a portion of this exposure. Just my opinion. Chris
IMO outside of certain sectors i really don't see the markets making much headway in the next couple years, if dollar continue to strengthen due to European mess that is going to hurt internationals and couple that with debt issues will hamper the stock markets in 2012. Due to that I think portfolio's should have 15-20% in PMs.
The $ may strengthen relative to other currencies. It absolutely won't strengthen relative to consumed commodities, food, energy, because that is dependent upon how many dollars are being flooded into the market. Anyone who buys groceries on a regular basis should have noticed some of the shocking prices on even basic things now. i.e. inflation. Gold will hedge against this. Edit: I forgot to mention that sovereign governments have been quietly buying gold by the tons.
What if one was skewed incorrectly? What if one had, say, 80 to 90 percent in pm's? (physical) Would that raise all kind of red flags? What if one put some of that into something else, like dollars, and then the dollar goes less and less value...would they be better off sticking with pm's? Real estate doesn't sound appealing..but I guess it could be for a young person.. Not to hijack the thread, but hopefully adding to it? Lucy
This may be an indirect stretch, in that we are talking about PM's here, but I haven't heard anyone bring up how gas prices affect the market. High gas prices can be tied to contributing to the last 5 recessions. It isn't so much that people can't afford to pay for gas, and spend less (although it's true to some degree), has has more to do with the fact that billions and billions of dollars go into forein bank accounts. That money is taken out of U.S. circulation, and the only way we can combat this is by more inflation. It is kind of like a catch 22. Indirectly we will be paying for Saudi and Iranian entitlement programs, through higher gas prices. This should result in a higher valued PM as a hedge against inflation. Just a stretch??
It costs energy to transport goods, to run machinery that harvests crops, or to keep a mine in operation. Energy can make prices on everything else rise or fall.
