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Category: Bullion Bulletin

Bullion Bulletin: Own gold the best way

What is the best way to own gold? Allocated gold, of course. What is allocated gold and why is it the best way? Let's take a fictional exampl...

11 December 2022

Gary Mead

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What is the best way to own gold?

Allocated gold, of course.

What is allocated gold and why is it the best way?

Let’s take a fictional example to get an answer – the case of three gold buyers, person A, person M and person Z.

A decides to invest in a kilo of gold but doesn’t want to run the risk of being burgled and possibly having the gold stolen. She does a quick internet search and discovers that gold can be bought through an exchange traded fund (ETF). The average expense ratio for gold ETFs is 0.65%. A has a bit of financial sophistication so knows to avoid an actively managed ETF (which has a higher expense ratio so costs more to sustain) and also to avoid leveraged gold ETFs, which can magnify both gains and losses. A just wants to own a kilo, and not be bothered. A chooses what seems to be the safest option and invests enough to secure a kilo of gold into an ETF. A is ignorant of the wider risks and possibilities.

Person M however realises there are possible risks with a gold-backed ETF. Such ETFs are securities which are designed to track the gold price. Buying a gold ETF does not give ownership of any physical gold – gold ETFs function similarly to stocks and currency – you don’t get access to physical gold, all you get is a piece of paper stating how much gold your investment is linked to. M understands that there is counter-party risk involved in buying a gold-backed ETF. Multiple people are involved in managing the ETF, which increases the risk of something going wrong.

If you buy a gold-backed ETF you don’t own any gold – you just own a share in the trust that runs the ETF. The ‘gold’ you have bought is unallocated. Unallocated gold is the most widely traded form of gold in the world. But it hides a way of advantaging as provider – usually a bank – by subjecting buyers to a risk they frequently remain unaware of. Your relationship is with the bank’s overall pile of assets, not with any specific pile of gold. The bank’s small gold reserve would be diluted by non-performing bond portfolios and other assets which don’t sell well in a crisis. So it is important not to be impressed by unallocated gold, or by it being physically stored in a bank’s vault, or by it being checked daily by bank regulators. Regulators are checking it to make sure the bank maintains a liquid reserve, and they are not interested in your entitlement as a bullion creditor.

Which means that if the ETF for any reason has to close up shop, you will find yourself at the end of a (potentially very long) line of creditors who want re-paying. And you pay fees for owning an ETF which will eat into the value of the gold investment. So M decides to buy some physical gold, pay the hefty premiums that come with bullion coins, shoulder extra costs for insurance, and be able to look at the gold whenever desired. M doesn’t consider potential obstacles for the future, such as selling the gold. Any future buyer might be suspicious – where did the gold come from? Has it been tampered with? Can M be trusted?

Z is the canniest of all three buyers. Z decides to buy gold via Glint. Glint provides its clients with allocated gold, making the client the outright owner of gold and you are no longer a creditor. Your allocated gold is your property; it can’t be used as anyone else’s reserve, so with allocated gold you get proper protection from systemic failure. And Z’s gold can be used as money, spent on everything from weekly shopping to an expensive holiday, and sent to other Glint clients. It’s the smart way to own gold – safe in Zurich vaults, owned by you, and as liquid as fiat cash.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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