owning physical gold/silver vs. exchange traded funds

So, doing a good bit of reading on this subject. I've been an investor in stocks bonds, options for many years. I'm starting to dabble in silver bullion just for the aesthetics of it, ie not investing, just collecting wildlife themed coins.

Those of you that invest. Question. What's the reason for owning physical gold/silver? This is not in relation to the world coming to an end SHTF scenario, but more a severe economic downturn.

Looking at buying silver coins, they seem to run $3-5 over spot, but I note these bullion sellers advertise buying back at just a bit over spot price (this is just for regular bullion coins). That means silver would have to move $3-5+ just to break even. Plus the hassle of storing and selling it. It would seem owning the exchange traded funds (the larger ones like GLD) would make more sense in terms of trading and making money off them.
Any rate I'd just be interested to hear from some of you who've really looked into this.
Chris

 

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The best answer I can give you is scale. Physical metals, in theory, trade off liquidity and premiums for lower transaction costs.

If you buy an ounce of silver in the form of sovereign bullion, you're looking at paying a $3-5 premium. If you tried to purchase a single share of SLV, you'd be looking at potentially $8 in transaction costs (buy & sell). The bid/ask spread on physical seems to be $2 on silver & $15 on gold, per troy, regardless of the actual price/premium. That spread and lower liquidity are the cost of being able to touch what you own. If you don't mind trading paper, and plan to purchase more than 20 troy equivalent at a time, ETFs make more sense, due to liquidity and storage fees built into the pricing model.

 

something I don't understand is how paper silver works. How do you use paper silver when you trade and invest?

 

Are you asking how ETFs function? I'm not sure that I'm reading your question correctly. Is it a logistical/functional question on how the transaction occurs?

 

Pretty much both. How do ETF's function, and how do transaction occur amongst them?

 

BTW, to the OP, I'm not calling you a liar, but I doubt you've done much trading in bonds if you're just starting to use commodity ETFs. I bought my first bond after being in the industry for eight years... a good 15 years after I started buying stocks... Bond trading is so chaotic to me, and yield curve analysis really forced me into a realization that I'm better off buying convertible stocks that pay set dividends than actual bonds. It's just something I feel more comfortable with, personally.

 

Well, people are different. Keep that in mind.

 

ETF is an acronym for exchange traded (mutual) fund. In the case of commodity ETFs, the fund manager purchases a fixed basket (as defined by the fund prospectus). With precious metals ETFs, the fund holds a certain amount of ounces for each share held in the fund. They also charge an internal fee for keeping track of accounting and for storage/transaction fees. Sometimes, the fund manager will use futures to help with pricing of the commodity, but this can lead to problems during the week when options expire, since the fund will always sell at loss and buy at a premium. There are other complications, as well.

To simplify things, we'll discuss the paper silver ETF. If you purchase shares in the ETF, you're really buying into a pooled account that controls millions of ounces of silver. If you own enough shares, you're given the option of taking physical delivery of your silver, at an additional expense. However, most people don't do this. The advantage to an ETF is that you can sell it immediately (assuming the stock market is open) without having to personally seek out a buyer. The disadvantage is that people who collect PMs occasionally don't "trust the system" and ETFs inherently require you to work within that system.

 

It has to do with investment costs and whatnot. Bonds are usually traded in 25 share blocks of $1000 face. So, to be a bond trader, you either need to be very smart/lucky (heavy leverage) or have a lot of start-up capital. Sometimes people will purchase or trade in fixed income mutual funds, but that really isn't investing in bonds anymore than purchasing a mutual fund would be investing in stocks.

 

That clears up so many questions I had! Thank you~!

 

It's still possible.

 

When I think about holding PM's on paper, I think of the Hunt Brothers.

Chris

 

Guess my post was a bit confusing. I've been an active trader in stocks and options for probably 15 years. At 54 now, I've retired from active trading and have gone into vanguard funds, using the three-fund strategy which gives us and international equity and bond exposure in a ratio comfortable for my risk tolerance. (where I get my bond exposure). Try as I might, I never understood bonds and stayed away from them. Only comfortable with them now because they're indexed.

 

Who are the hunt brothers?

 

Google them and read the story.

Chris

 

additionally, you have to research the different etfs out there as not all are created equal. I never looked at any of the silver etfs, I did trade in GLD for some time which is one of the largest and bit more stable than some of the other smaller ones.

Also, the bigger etfs are better in that the bid/ask range is closer because they trade in larger volumes than the smaller etfs and makes a huge difference if you're trading in large blocks.

 

this is a pretty good writeup on the hunts

http://www.investopedia.com/articles/optioninvestor/09/silver-thursday-hunt-brothers.asp

 

OP, ETF's track spot pm but do not necessarily have to track it perfectly, so there is some basis risk. Only large holders of them have the right to petition to take physical delivery.

Overall, the benefits of owning "paper pm" is much lower transaction fees, and much lower buy/sell spread. The advantage of owning physical pm is no counterparty risk and lower carrying fees, (ETF's charge yearly fees, so long term its cheaper if you store pm yourself). Plus, with physical you can look at pretty metal, or have that metal in the form of a pretty coin. The downside, of course, is always someone can steal said pretty pm from you, something not possible with paper pm.

 

I wouldn't go so far as to say it isn't possible with paper pm. It's just different:

http://www.investopedia.com/articles/investing/032613/best-way-buy-silver.asp

http://www.investopedia.com/financial-edge/0312/what-happened-at-mf-global.aspx

Long story short:

In the end, creditors and lawyers essentially stole a whole lot of silver from investors.

One concept that many people use to sell paper pm is that there is physical bullion behind the paper. That's good, right? Well, it's also bad because there's a remote possibility that someone will manage to pull off a successful heist of a large scale precious metals warehouse. If that were to happen to GLD or SLV, would investors somehow be reimbursed?

 

that's an interesting thought. The other issues I'm wondering, who's to say GLD SLV or others are actually holding the equivalent amount of PM for shares outstanding? Honor system?

Definitely not found with ETF as someone else pointed out tho, you don't have the same "feel" with etfs as you have with the physical PM.

I've never actually explored PM as investment, perhaps I should, at this point just going to collect the coins I like.