Reply #44: Gold [View All]

IDemo,

You've brought up a very interesting topic, and one I know at least something about.

I'm somewhat of a "gold bug" myself.

The problem with owning Gold ETFs, or any other version of "paper" gold is that you don't really own any solid gold. Instead, you own a paper claim to gold. In many cases, the seller of the paper gold doesn't even have the gold that you think you've already purchased. When you actually request delivery of the gold, the holder of your paper gold must still go out and actually purchase the gold (that you thought the seller already had).

When you actually request delivery of your gold, you are charged a "conversion" fee, which is usually around 4-6% of the value of the gold. Though the seller claims this fee is to convert your "solid" gold into gold coins, it's actually to convert your "paper" gold into "actual" gold coins. In other words, the holder of your gold has to go out and actually purchase the gold (The gold you thought he already possessed.)

It may take weeks to actually receive your gold. And your seller is usually incorporated. Which means he can declare bankruptcy if necessary and never deliver the gold you purchased. This is not a "theoretical" consideration. I've already had it happen to me.

If you want to purchase gold, you need to actually take possession of it. If you purchase an ETF, you've purchased nothing but a paper claim to gold. And that claim could become worthless in an economic downturn, as the seller may not be able to make good on that claim.