How I'm Putting All My Cash Into Gold

This article is part of our Rising Star Portfolios Series.

Yesterday I told you that I'm shifting my Rising Star Portfolio cash hoard into gold to protect my purchasing power because gold still offers a much better risk reward ratio than cash. Here's how I'm going to do it.

Let's get physical
There are many ways to get exposure to gold, including buying physical metal itself in bullion form, mining shares, mutual funds, and exchange-traded funds (ETFs). The safest option is physical gold because there is no mining or counterparty risk (where the gold is stored), but it can be inconvenient to buy and store. How much better would it be if we could own an interest in physical gold and buy or sell it on an exchange? Luckily, a trust has been created that does just that. It's called the Sprott Physical Gold Trust (NYSE: PHYS  ) , and for an annual cost of only 0.65%, you get the best physical gold vehicle on the market.

Sprott Physical Gold Trust is a closed-end fund that invests almost all its assets into gold bullion that is stored at the Royal Canadian Mint. The fund's units trade on the New York Stock Exchange. Right off the bat, we see three positive attributes: (1) physical gold held by the trust, (2) ability to buy or sell shares on an exchange, and (3) gold not stored in a commercial bank (because you might not be able to get it out).

I've chosen Sprott over the popular ETFs SPDR Gold Trust (NYSE: GLD  ) and iShares Gold Trust (NYSE: IAU  ) for three reasons. First, the maximum capital gains tax rate on the sale of those ETFs is 28%, compared with a potential 15% for Sprott (see here for details). Second, individual investors are able to withdraw actual gold from Sprott, unlike the other two. Third, I judge counterparty risk to be much higher with the others. When push comes to shove -- if there's a run on gold, for example, or a global currency collapse -- if you own the SPDR Gold Trust or iShares Gold Trust, you might not have as much of a claim to physical gold as you think.

Net asset value
Because Sprott trades on an exchange, its price can rise above or below its net asset value (NAV), suggesting it might not track gold's movements perfectly. But I'm not too worried: Since inception in February, the premium to NAV has ranged from 0% to 24%, clustering between 8% and 13%. Right now, you'd pay about a 3% premium, well below that average. I see more upside than downside because in a rush into physical gold the premium could increase, and on the downside the premium would likely not go much lower before opportunistic buyers stepped in. A slight premium also seems fair, given transaction costs with a gold dealer would be at least 3%.

Preserve your fortune
I showed yesterday how even at nominal highs, there is still a very attractive risk/reward ratio on offer with gold and how the real risk is holding cash. Therefore, I'm choosing gold over paper while I wait for excellent investing opportunities. And I'm doing it today: using my cash position of almost $5,000 to buy shares of the Sprott Physical Gold Trust. I don't expect this move to make me a fortune, but I expect it to preserve my fortune in what are challenging times for the fiat currency system.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Andrew Sullivan, CFA, owns shares of no companies listed above. The Motley Fool owns shares of Sprott Physical Gold Trust. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 16, 2010, at 3:36 PM, lewellen180 wrote:

    Okay, I just checked the prospectus.

    You can indeed redeem your shares for actual bullion, as follows:

    "Redemption requests must be for amounts that are at least equivalent to the value of one London Good Delivery bar or an integral multiple thereof, plus applicable expenses. A ‘‘London Good Delivery bar’’ weighs between 350 and 430 troy ounces (generally, most bars weigh between 390 and 410 troy ounces)."

    So call it an average of 400 troy ounces per bar; that means you need to have $546,400 worth of shares to take physical delivery.

  • Report this Comment On December 16, 2010, at 3:42 PM, mtf00l wrote:

    Sounds like another fishing net for the retail investor...

  • Report this Comment On December 16, 2010, at 7:38 PM, TMFAleph1 wrote:

    Gold is NOT a good store of value in the short-term -- its price volatility is much too high for that. You could easily find you have 10-20% fewer dollars to invest when it comes time to shift your assets into stocks, which you have explicitly said you are planning to do.

    Alex Dumortier

  • Report this Comment On December 17, 2010, at 7:33 AM, newbie01 wrote:

    I've come across a fund that I think is worthwhile if anyone is interested; run by a company called Charteris;

    There's a link below, if anyone is interested in putting in also, its so far been rather profitable should anyone fancy making a quick buck too :D the safety net is that as soon as you've made a return you're able to pull your money out.

    Anyway, check the numbers out;

    http://www.charteris.co.uk/funds/gold.html

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1402779, ~/Articles/ArticleHandler.aspx, 10/20/2014 4:25:14 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement