Physical vs. Artificial: Two Types of Metals Investing

A lot of investors misunderstand the best way to utilize precious metals investing, and will often put a lot of their hard earned dollars into metals with the wrong mindset; maybe expecting something very profitable to come out of it, or just thinking that they won’t have to worry about it if their money is in metals.  

Well, the truth is, the best way to utilize precious metals investing is to come at it from the angle of “I’m buying this to hold forever, and to one day pass it on to my kids.”  By approaching it this way, you are not setting yourself up for disappointment if the price of gold or silver moves up and down slowly over the course of several years.  You’re not waiting for it to shoot up in the hopes of cashing in for a big profit.  You’re merely holding it with the understanding that regardless of the market conditions, whether its good or bad, you’re money is protected.

Being a TRADEway Prospector, you know that we look at precious metals as a form of protective investing, not a different way to trade.  We teach you various strategies to help you accomplish this protective investing, in order to preserve your generational wealth.  However, there are ways today in which you can gain exposure to the metals market without ever having to own a physical coin or bar.  And on top of that, you can even implement more of our short-term trading styles to potentially profit from gold or silver’s price fluctuations.  Let’s talk about a couple of ways that’s possible:

Many people do not understand the differences between buying physical gold, silver or other precious metals and buying paper metals products, such as a gold or silver-based ETFs.  But, the differences are very extreme, and they give us multiple opportunities within the market itself.  For example, let’s use GLD, the SPDR Gold Shares ETF, in contrast with physical gold to see how we can use this artificial tool to trade the price of real gold.

The GLD ETF was designed and intended to allow investors to participate in the gold market without having to take actual delivery of the gold or deal with other potential barriers such as custody or transaction costs.  In other words, by purchasing shares of GLD, one could potentially profit from a rising gold price or lose from a falling gold price.  This is because shares of GLD are designed to try and closely mimic the price of gold minus the fees and expenses of the fund.  Now, at the time this article is being written, the price of GLD is nowhere near the Spot Price of gold (GLD: $120.83 vs. GOLD: $1,275.80).  However, even with the price difference, the patterns that are made on both charts are almost identical, which is where the opportunity to make more short-term trades on the price of gold comes into play.

Each share of GLD represents a fractional, undivided ownership interest in the trust. GLD owns only gold bullion and sometimes cash.  In addition to potentially allowing more investors to participate in the gold market, GLD may also provide an investment vehicle in gold that can be used by various funds and pensions that do not have the capability to invest in physical bullion or derivatives of physical bullion.

Owning shares of GLD does not equate to owning actual physical gold, as previously implied.  This is very important to understand, because although the fund is based on gold and holds gold and/or cash as its only assets, share holders are not guaranteed to receive physical gold in exchange for their shares.  With that being said, one can exchange their shares for baskets of gold but it must be done through the fund’s trustee which is the Bank of New York Mellon.

However, the Bank of New York Mellon does not deal directly with the public.  In order for a shareholder to take delivery of the actual physical gold, he/she must be an authorized participant and deal in 100,000 share blocks.  A 100,000 share block at current prices equals a monetary value of approximately $12,083,000; you’d have to be a pretty big investor!  

The point to be made here is that while taking delivery is possible for some, for most it is out of reach financially and also involves a process.  This is nearly impossible for the large majority of investors out there today who are interested in investing in precious metals.  This is why we advocate only investing in physical bullion, if your desire is to own a “safe-haven” asset.  I believe that it can only be a true “safe-haven” if it’s tangible!

In conclusion, as an investor you can utilize options such as GLD in order to potentially create cash flow, by playing the volatility of gold’s price.  You can implement many of the strategies taught in other TRADEway courses, and get in and get out without the hassle of buying physical bullion, awaiting their arrival, and then trying to sell them back at a decent price and ship them back off.  It is too difficult to trade physical metals in the short to mid-term for a substantial profit.  But, thankfully, there are other options there!

Pros of precious metals-backed ETFs:

    •    Provides easy access to gold or silver markets

    •    Easy to monitor day-to-day activity

    •    Small minimum investment

    •    GLD fees may be lower than costs associated with storage and protection of physical bullion

Cons of precious metals-backed ETFs:

    •    Ownership in GLD does not equate to owning physical gold or physical silver

    •    GLD has certain potential counter-party risks

    •    Taking delivery of physical gold or silver bullion is out of reach for most investors

    •    Potential for liquidity issues

    •    In an economic or geopolitical crisis, shares may not be exchangeable like physical metals