With so many different vehicles to purchase gold, silver and platinum available on the market it is easy to choose the wrong one.

A high degree of caution is required; not all precious metals products are the same.

We saw during the financial crisis of 2008 that gold stocks performed badly, getting dragged down with the wider equity markets. We also saw that closed end mutual funds and ETF’s traded at significant premiums throughout this time and during the flash crash of 2009 we saw that some ETF’s had no bids at all for a period of time. One of the drivers of the 2008 crisis was the collapse of the complicated CDO’s where debt obligations were bunched together, leveraged, and repackaged into very risky and complex products which suffered substantial write downs once the bubble in the real estate market began to unwind.

Who Owns The Gold?

There have been significant questions raised over the holdings of gold ETF’s as it is standard practice for Authorized Participants such as banks and brokerage houses to contribute baskets of borrowed assets to ETFs. As such bullion in gold ETF’s may be borrowed from central banks or other institutions. In the event of a crisis such as was seen in the CDO market or the banking crisis, it would be the central banks and institutions that would lay claim to gold leaving the shareholders in a very precarious position.

Only gold products that do not compromise the fundamental attributes of bullion should be considered: liquidity, no counterparty risk and independent of management skills.

Counterparty Risk

Counterparty risk should be avoided. Any proxies of bullion such as certificates, futures contracts, mining stocks or even bullion that is held in pooled accounts add unnecessary risk and defeat the reasons for owning gold. .

Independent of Management Skills

Gold holdings should be independent of management skills. Gold is the purest hedge against the financial system which is in disarray. It is negatively correlated to all the currencies and equity markets. As soon as a manager is introduced who engages in market timing or hedging or leveraging, it is the skill of that individual manager who determines the performance of the holding rather than the gold itself.

Physical Bullion

Bullion is highly liquid, it trades 24 hours a day 7 days a week so closed-end funds or ETF’s where the liquidity is dependent on the market rather than the bullion itself should be avoided. An open-ended mutual fund trust which holds physical bullion, such as the funds presented by Bullion Management Group, offer the same liquidity as bullion as they are priced, purchased and redeemed daily based on the Net Asset Value of the funds.

Those ndividuals who are considering purchasing physical bullion need to make sure that the title is transferred to them. Then they should ensure that the bullion is stored on an allocated basis and is insured.  Holders of bullion which is not held on an allocated basis do not own any specific bullion bars; they merely have a debt obligation from the issuer. As a result, they take the risk that their bullion may be leased out without their knowledge or consent, or that the implied bullion may not be there at all. Bullion stored on an allocated basis does not form part of the custodian’s assets and may not be leased into the market or used in any way. In the event of bankruptcy or insolvency, bullion bars stored on an allocated basis are not subject to third-party claims. The exact weight, fineness and serial number of bars purchased should also be insisted upon.

Bullion Management group offers the BMG BullionBars program where all of the bullion satisfies the above requirements.
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