Thursday, December 3, 2009

Ways for Canadians to Invest in Gold

Gold is very much in the financial news of late with it making new USD highs pretty much every day for the last month or so. Most of the investment advice out there is aimed at the US investor however and doesn't really address the best options for investors in the great white north. When I first picked up some units of the iShares COMEX Gold Trust (NYSE:IAU) back in June 2008 I didn't even realize it was also available on the Toronto Stock Exchange (TSE:IGT). Here's an overview of the major options I know of for Canadians who want some investment exposure to gold.

ETFs that hold physical gold directly are a decent option for most investors. The biggest and most liquid is the SPDR Gold Trust (NYSE:GLD). The iShares COMEX Gold Trust (NYSE:IAU) is also fairly large and liquid. You can also buy the iShares COMEX Gold Trust on the Toronto stock exchange as TSE:IGT which can save currency charges but it is much less liquid than IAU on the NYSE so you should always use limit orders if you want to go that route.

One word of warning: I got a little burned when I first bought into the iShares COMEX Gold Trust because I tried to buy IAU through my Canadian dollar trading account and eTrade 'helpfully' bought shares in IGT for me instead and charged me a round trip currency conversion charge (I got double charged for CAD to USD and then back to CAD). I suggest buying IAU through a USD trading account and IGT through a CAD trading account.

You will hear concerns from some investors that because the gold ETFs do not hold fully allocated gold at all times there is a risk that in a major financial crisis they may be exposed to some counterparty risk. My reading of the prospectuses is that IAU/IGT has stricter guidelines on maintaining a certain minimum of fully allocated gold at end of business so it may be a slightly safer option than GLD. Personally I think these ETFs are a perfectly good way to get exposure to the gold price and will be safe in all but a complete financial meltdown. If that happens then physical gold in your possession is probably your only safe bet (more on that below).

For Canadian investors who want exposure to physical bullion held in a vault and are wary of ETFs an alternative option that may be less exposed to counterparty risk is the Central Gold Trust (TSE:GTU.UN) (gold bullion only) or the Central Fund of Canada (TSE:CEF.A) (gold and silver holdings). Shares in these companies represent a share in directly held gold bullion (and silver in the case of the central fund). Unlike an ETF there is no straightforward mechanism for redeeming shares for physical gold however which means that the Net Asset Value (NAV) does not generally track the price of gold as closely as it does with an ETF. In practice this usually means you pay a premium over NAV which may be quite high (yesterday for example it was around 9.4%). ETFs rely on arbitrage from big financial institutions to keep the price of the ETF close to NAV but there is no such mechanism for these companies.

An alternative way to gain exposure to gold is through gold mining stocks. Many gold miners trade on the Toronto Stock Exchange so are easily available to Canadian investors. Gold stocks tend to correlate to the price of gold but are a good deal more volatile. This may mean greater profits in a rising market but it also exposes you to the risk of greater losses. You are also exposed to all the normal risks of investing in any stock. Some of the big gold mining names that trade on the Toronto Stock Exchange are Barrick Gold (TSE:ABX), Newmont (TSE:NMC), Goldcorp (TSE:G), Kinross (TSE:K), Yamana (TSE:YRI), Agnico-Eagle (TSE:AEM) and IAMGOLD (TSE:IMG). There are also numerous small-cap junior gold miners listed on the TSE for the real speculator.

If you want broad exposure to the gold mining sector without stock picking then another option is the iShares CDN Gold Sector Index Fund (TSE:XGD). This ETF holds a basket of gold stocks and is fairly liquid. You can also trade the US listed Market Vectors Gold Miners ETF (NYSE:GDX) if you prefer (and don't mind the currency conversion charges).

Another couple of interesting ways to get some gold exposure are GoldMoney and BullionVault. Both promise to give you a way to buy and own physical bullion and trade it directly with other users online as a form of digital currency. I find the idea pretty interesting and as far as I can tell both offer full individual ownership rights to the gold you own (no counterparty risk) and appear trustworthy. I have no direct experience with either however.

Finally we have the true zombie-apocalypse insurance of buying physical gold and storing it somewhere you can personally access it in a full on financial emergency or end of the world scenario. The simplest way to own physical gold (and silver if you want it) that I've found is to buy from ScotiaBank's precious metal service, ScotiaMocatta. You can buy gold and silver maple leafs in a variety of weights as well as Scotia stamped bars in a variety of weights directly online and have them securely shipped anywhere in Canada. Prices track the live gold spot price and so you can only place an order during Canadian trading hours (8am-5pm EST Mon to Fri). Storing large amounts of physical gold and silver at home is not terribly wise or practical for the average investor but a small amount of true disaster insurance is probably not a bad idea... Plus the coins are so shiny.

Well that about covers the major options I'm aware of for Canadian investors who want to put some money in precious metals to protect themselves from the global race to the bottom by the world's central banks. As the world economy continues to falter at least you can give yourself a bit of security with the only form of money
that was just as accepted in ancient Rome as it is today.

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Bernanke's Confirmation Hearing

I was quite cheered to see Bernanke being given a bit of a hard time at his confirmation hearing today. I imagine he'll ultimately end up keeping his job but at least he didn't get away without being hit with a few tough questions, even if he did pretty much just dodge them.

I wonder how he'll be viewed when people look back on this period in 10 years? Will some central banker of the future make his name writing the definitive study of Great Depression II and Bernanke's role in it?

Wednesday, December 2, 2009

Book Review: The Greatest Trade Ever

The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History

I'd heard a bit about John Paulson before picking this up in Chapters and how he'd made a killing predicting the sub-prime crisis. I'd also seen the name recently in connection to his bullish views on gold and his new gold focused hedge fund. I didn't know many of the details of the story though and thought this book sounded pretty interesting.

Overall it's a pretty good insight into how Paulson's fund managed to turn their bearish views on sub prime housing into a cool $15 billion profit. It highlighted for me how it's not enough to simply predict the future in investing, you also have to get the timing right and figure out a tradable strategy with an attractive risk-reward structure. I'd have liked to see more direct insight from Paulson himself on how he approaches investing and perhaps a little less only-tangentially-relevant biographical detail but the book is still an interesting read. It was also nice to discover a bit more about Andrew Lahde - a name I only previously knew from his notorious (and rather brilliant) f-you farewell letter when he closed his hedge fund after also making massive profits from the sub-prime collapse.

I'm naturally attracted to contrarian investment strategies and there's something beguiling about the story of an outsider whose predictions nobody believes but who goes on to be right and to make a fortune. It's always hard to tell how many of these stories can be put down to a combination of a kind of survivorship bias and the fact that they make for much more interesting reading than more mundane successes but there does seem to be such a common pattern of outsiders achieving great success that I like to think there's a real phenomenon at work here. Of course there's probably more than a bit of wishful thinking at work there too.

Don't expect to come away from this book with any specific tips on how to make your own career-making trade but you can expect an interesting and mostly well written story and some insight into the sort of thought processes that might make you a fortune through contrarian strategies. Or might not.



Comparative Disadvantage is intended to be an outlet for my thoughts and musings on economics, investing, rationality and other topics that spark my interest.