Jon Nadler on Gold (Part II): Some Things to
Consider
December 16, 2007
Jon Nadler, Senior Investment Products Analyst, Kitco Bullion Dealers, shares his thoughts with us in a two-part
interview. In the first part Jon gave an overview of why he thinks an individual investor would want to buy gold or
silver. In Part II, presented here, he weighs the various ways individuals can own gold.
Jon’s gold market commentaries are frequently quoted by the U.S. Canadian and global financial media and his
30-year career has focused exclusively on the precious metals market and on its related investment products.
TGR: You’ve covered various methods of buying gold. Could you also give the pros and cons of each one? And
tell us what an investor should consider when looking at buying gold?
JON: Well, once they’ve decided that the asset class is desirable for their basket of assets, the exposure to gold
can take a lot of different forms. Traditionally, most people are buying a mutual fund that already lends itself
towards gold, or an ETF, or mining shares, or just a handful of gold coins and go home with them.
In principal terms, I think coins and bars dominate the scene for the individual investor whose absolute priority is
proximity to the physical material and perhaps an expectation of having to barter coins or employ gold as money
down the road, and – again, while I am not a big advocate of crisis – trading it for bread and gas. A small stash of
gold coins or gold bars in sectionals is probably not an unwise buy, because at the end of the day it still does
represent portable wealth, and compact portable wealth at that.
But the pros for this would be global acceptability and relative low premium. And that “relative” has a big capital
R, because on the flip side, you are indeed paying 5, 6, 7, 8 and on up in terms of percentage points above the
current price of gold to buy a gold coin or bar and take delivery of same. So the classic attributes are, again,
portability, visibility, liquidity. The negative features would be the high premiums and potential liquidity issues, if,
in fact, you find yourself in a strange place that doesn’t really accept the common popular coins, and perhaps
wants to pay you in melting value. The bars are basically the same idea; it’s probably a little more difficult in
letting go of a bar if you don’t have certificates of assay and so on.
On numismatic coins, I am really not a proponent because the premiums are far, far higher due to the rarity of
the coin, and you’re getting into subjective evaluation and grading issues, all of which may not be enough to
overcome this. The reason they’re being promoted is the fear of confiscation, which I personally don’t feel is a
material threat. So to pay the equivalent of $1,000 or $2,000 per ounce of gold today for a coin that is basically
worth $700 to $800, I see very little worth. If you’re an avid collector and know what you’re doing, that’s fine; a
lot of people find enjoyment in the hobby. But as an investment in gold, per se, I don’t think so.
And then you have the ETFs, which are the relative new arrival on the scene; having entered in late 2004. The
ETFs have amassed about 600 tons of gold holdings, which is a significant accomplishment. On an equivalent-size
basis, they’re about the 10th largest central bank out there, right ahead of China, I believe. But it’s also a vehicle
that I feel has given institutional players an entrée into this marketplace, and thus has probably altered gold
market landscape just a bit. It has added volatility and other features that we are not yet fully aware of because, let’
s face it, thus far, it’s been on a one-way accumulation mode and has grown and grown and grown.
But no one really knows what happens in a downward phase in a bear market, or what 600-ton hoarding could do
to the market. Actually, I think it helps the market on the way up. We would hope it is longer-term holding, but if
I look at the makeup of the ownership of these funds, I wouldn’t be surprised to find a lot of institutional desks and
trading desks and funds whose loyalty to gold may not be the same as it is with the individual investors. And the
money underlying this may be fickle enough to leave once the profit objective is achieved.
So, it’s not exactly what it appears to be. It’s a wonderful way to allow an institutional desk to participate at low
cost and attract the market. However, the individual investor doesn’t look at it as a viable alternative to ownership
of physical or custodial gold.
One of the drawbacks that I think they’re looking at is the attrition of balances due to management costs being
assigned against your ownership. It becomes a wasting asset, and your initial 100 ounces becomes less and less as
time goes on. Then you have capital gains treatment; an ETF is not treated like normal stocks at 15% but at 28%
like collectibles.
And some people have raised issues about custodians, sub-custodians, audits, and so on, which I am not
necessarily afraid of as the issues, because I think that the trustees are doing their best to give the underlying
physical gold its proper place in the vault. But to those who are concerned about credit risk, at the end of the day,
yes, you are still taking the promise of a trustee to go out and perform that which he is supposed to do on your
behalf as a gold buyer. And yet, you are buying a share of an exchange traded on a stock exchange, subject to all of
those situational pros and cons with it – trading holidays, brokerage commissions if there are any. It’s ultimately
going to be more like a stock and less like a gold coin.
So, the ETF has its place, and I think it will continue to grow, but I would like to see how it behaves in a two-way
market at first and then see how much of the ownership makeup of this product is with Merrill Lynch and Credit
Suisse and so on, and all the other institutions and pension funds.
For the moment, while I think ETF has cannibalized a good number of gold coin sales here and there, these other
forms continue to be recording pretty nice sales numbers. And some of them are actually growing substantially in
balances — the Kitco Pool accounts, the GoldMoney Program, and Perth Mint Certificates – all of which are not
as new as the ETF, but certainly in terms of this bull market, they pretty much coincided with the advent of
thereof.
TGR: How are the Kitco and the GoldMoney different from the ETF?
JON: The primary difference is you do not have ownership of a share of gold that is traded on the stock exchange.
You have actual gold ownership that is held in a vault on your behalf. And the balances that you purchase at the
outset are not impacted by any management costs assigned to you by any trustee, so you’re free of carrying costs,
and your tracking of the gold price is literally penny for penny, dollar for dollar.
So the only thing you need to overcome is the initial price structure on the bid and offer spread, which is pretty
minimal. Certainly in the case of Kitco Pool accounts it is less than 1% round-trip, and then there’s the interface of
being able to trade these instantaneously online or via the telephone, and within 48 hours being cashed out if that’s
what you need to do, or switch to another metal, like silver. Or, switch to another currency; you can redeem your
gold into Euros, British pounds, or Canadian dollars.
I think none of those are doable with the ETF. And one of the more important features is definitely not doable
with the ETF, which is your ability as the holder of the Kitco or gold Rand to redeem your balances in physical
gold product, coins, small bars, and only incur a small fabrication or shipping cost. And that’s it. So converting to
physical is very easy with custodial gold, but not so easy with ETF; in fact, it’s not doable.
TGR: You mentioned that there is no management fee like you have with ETF, but there must be some type of
carrying cost to put it in a vault somewhere.
JON: Really, the only time you have a carrying cost for a custodial arrangement is if you choose the allocated
guise of ownership. Let’s say the Perth Mint Certificates – they actually have two flavors of the product. One is
unallocated where you don’t pay custodial fees, and your holdings are part and parcel of a large bar that is already
in a vault, that is already allocated out on pallets. So, you don’t have to pay any storage fees or any insurance fees.
But if you chose to segregate 50 coins and put them in a box with a label with your name on it, then yes, you
would pay about 1.5% per annum for storage, insurance, and audit. In consumer terms, that’s first of all
justifiable. You probably can’t do much better by opening your own private storage account with a custodian like a
bank or a Brinks or a similar arrangement.
So, that’s the attitude if you chose the segregation total allocation. GoldMoney, I think, basically subsidizes the
custodial charges, and although you pay something on the order of 1.2 grams of gold a year, that still amounts to
only $30 to $40. So, it’s still not a terrible cost to bear, provided that you also recognize that the alternatives that
people are thinking about as “safe” are really not safe. Taking coins or bars home and putting them in a bank safe
deposit box leaves you in a completely uninsured guise. You have no insurance on those boxes if something
happens at the bank, and yet people tend to believe that they’re safe with them – and even those boxes have $60 to
$70 or $80 charges per year.
So, there are ways to do this very efficiently and with no carrying costs, and really have only the small spread to
overcome. If you’re trading-minded, or even if you’re long-term minded, the balances that these products have
amassed are pretty substantial. The GoldMoney has grown to about $230 million to $240 million in five years.
Kitco has been around for a decade, and we really launched it after we had an actual website in 1995. By 1997 we
were in the custodial product business, and it’s definitely gone very nicely.
So, there are alternatives to taking the goods home. The three attributes that an investor of this insured orientation
that I have described would seek would be value for money, safety while in custody, and of course last, but not
least at all, liquidity – how easy would it be to sell when the price hits $850 or $900 or on a given Wednesday
when you feel like selling?
Gold coins, as nice as they are, or bars in your possession or in custody, can’t provide you those features because
there’s a definite difference in buying gold at 7% over market versus 0.5% over market and paying 1% or 2% for
storage or management fees and so on versus not paying anything and still have the safety of an insured vault. Of
course, there’s also the difference in having to pack, ship, weigh, and take the best offer for shipping back 20
Maple Leafs to some dealer far away versus picking up the phone and saying, “Hey, I’m done,” and 48 hours later
the funds are here. You’ve banked by wire, and you haven’t even left your house.
TGR: Right. How does one get into the Kitco Pool fund?
JON: Kitco Pool is extremely easy. Basically, it is just signing up online or on the phone. You don’t even have to
fund the account initially; you can just open it and decide when. There are no minimums required in terms of
purchase amount, which means you can embark on a system on an accumulation plan, which is very popular.
People have a regular monthly purchase plan, and they literally use it as a savings account. It’s a very good
strategy because you can cost-average over long periods of time, and obviously if you get more ounces at a low
price and fewer at higher, you will probably end up better off than the fellow who tries to hit the top and the
bottom, thinking, “Ah, ha,” and they may miss it by 5% or 10%. And so it gives you that flexibility.
It also gives you the ability to switch from one metal to another or to redeem for another currency if that is your
desire. You can take payout in dollars or in other currencies. Checking balances and all of that is as easy as with
your online checking. You just log in, use the main password, and see exactly what you have and know what it’s
worth any time, day or night.
Basically the same with the GoldMoney, except for some limitations – you can only do it by Internet, not by
phone, and some of the payment methods that Kitco accepts are far more flexible. GoldMoney really only does
wire transfers – period.
But other than that, they’re both digital forms of gold, and they’re all backed by physical gold in actual vaults on
actual pallets. Perth Mint is a little bit different because there the interface. The actual evidence is a certificate that
you receive and that you hold onto. It proves that you hold gold at that mint. Its minimum is $10,000; the
subsequent minimum is $5,000. So it’s designed as a long-time accumulator with a little bit higher net worth,
perhaps. But it’s also ideal for people who say, “You know what? I really like the appeal of Perth; it’s a century-old
mint – 109 years, actually – in a very remote urban area on earth, thought to be very safe from all sorts of
trouble." And because of the ownership of this mint by the provincial government of Western Australia, you
effectively have a dual layer of insurance and guarantees that would tend to make you hold in the event of some
mishap at the corporate arm, which is the mint. And that’s additional peace of mind for a buyer.
TGR: Very good. I think we’ve covered quite a bit. We really appreciate your time and your insights.
Consider
December 16, 2007
Jon Nadler, Senior Investment Products Analyst, Kitco Bullion Dealers, shares his thoughts with us in a two-part
interview. In the first part Jon gave an overview of why he thinks an individual investor would want to buy gold or
silver. In Part II, presented here, he weighs the various ways individuals can own gold.
Jon’s gold market commentaries are frequently quoted by the U.S. Canadian and global financial media and his
30-year career has focused exclusively on the precious metals market and on its related investment products.
TGR: You’ve covered various methods of buying gold. Could you also give the pros and cons of each one? And
tell us what an investor should consider when looking at buying gold?
JON: Well, once they’ve decided that the asset class is desirable for their basket of assets, the exposure to gold
can take a lot of different forms. Traditionally, most people are buying a mutual fund that already lends itself
towards gold, or an ETF, or mining shares, or just a handful of gold coins and go home with them.
In principal terms, I think coins and bars dominate the scene for the individual investor whose absolute priority is
proximity to the physical material and perhaps an expectation of having to barter coins or employ gold as money
down the road, and – again, while I am not a big advocate of crisis – trading it for bread and gas. A small stash of
gold coins or gold bars in sectionals is probably not an unwise buy, because at the end of the day it still does
represent portable wealth, and compact portable wealth at that.
But the pros for this would be global acceptability and relative low premium. And that “relative” has a big capital
R, because on the flip side, you are indeed paying 5, 6, 7, 8 and on up in terms of percentage points above the
current price of gold to buy a gold coin or bar and take delivery of same. So the classic attributes are, again,
portability, visibility, liquidity. The negative features would be the high premiums and potential liquidity issues, if,
in fact, you find yourself in a strange place that doesn’t really accept the common popular coins, and perhaps
wants to pay you in melting value. The bars are basically the same idea; it’s probably a little more difficult in
letting go of a bar if you don’t have certificates of assay and so on.
On numismatic coins, I am really not a proponent because the premiums are far, far higher due to the rarity of
the coin, and you’re getting into subjective evaluation and grading issues, all of which may not be enough to
overcome this. The reason they’re being promoted is the fear of confiscation, which I personally don’t feel is a
material threat. So to pay the equivalent of $1,000 or $2,000 per ounce of gold today for a coin that is basically
worth $700 to $800, I see very little worth. If you’re an avid collector and know what you’re doing, that’s fine; a
lot of people find enjoyment in the hobby. But as an investment in gold, per se, I don’t think so.
And then you have the ETFs, which are the relative new arrival on the scene; having entered in late 2004. The
ETFs have amassed about 600 tons of gold holdings, which is a significant accomplishment. On an equivalent-size
basis, they’re about the 10th largest central bank out there, right ahead of China, I believe. But it’s also a vehicle
that I feel has given institutional players an entrée into this marketplace, and thus has probably altered gold
market landscape just a bit. It has added volatility and other features that we are not yet fully aware of because, let’
s face it, thus far, it’s been on a one-way accumulation mode and has grown and grown and grown.
But no one really knows what happens in a downward phase in a bear market, or what 600-ton hoarding could do
to the market. Actually, I think it helps the market on the way up. We would hope it is longer-term holding, but if
I look at the makeup of the ownership of these funds, I wouldn’t be surprised to find a lot of institutional desks and
trading desks and funds whose loyalty to gold may not be the same as it is with the individual investors. And the
money underlying this may be fickle enough to leave once the profit objective is achieved.
So, it’s not exactly what it appears to be. It’s a wonderful way to allow an institutional desk to participate at low
cost and attract the market. However, the individual investor doesn’t look at it as a viable alternative to ownership
of physical or custodial gold.
One of the drawbacks that I think they’re looking at is the attrition of balances due to management costs being
assigned against your ownership. It becomes a wasting asset, and your initial 100 ounces becomes less and less as
time goes on. Then you have capital gains treatment; an ETF is not treated like normal stocks at 15% but at 28%
like collectibles.
And some people have raised issues about custodians, sub-custodians, audits, and so on, which I am not
necessarily afraid of as the issues, because I think that the trustees are doing their best to give the underlying
physical gold its proper place in the vault. But to those who are concerned about credit risk, at the end of the day,
yes, you are still taking the promise of a trustee to go out and perform that which he is supposed to do on your
behalf as a gold buyer. And yet, you are buying a share of an exchange traded on a stock exchange, subject to all of
those situational pros and cons with it – trading holidays, brokerage commissions if there are any. It’s ultimately
going to be more like a stock and less like a gold coin.
So, the ETF has its place, and I think it will continue to grow, but I would like to see how it behaves in a two-way
market at first and then see how much of the ownership makeup of this product is with Merrill Lynch and Credit
Suisse and so on, and all the other institutions and pension funds.
For the moment, while I think ETF has cannibalized a good number of gold coin sales here and there, these other
forms continue to be recording pretty nice sales numbers. And some of them are actually growing substantially in
balances — the Kitco Pool accounts, the GoldMoney Program, and Perth Mint Certificates – all of which are not
as new as the ETF, but certainly in terms of this bull market, they pretty much coincided with the advent of
thereof.
TGR: How are the Kitco and the GoldMoney different from the ETF?
JON: The primary difference is you do not have ownership of a share of gold that is traded on the stock exchange.
You have actual gold ownership that is held in a vault on your behalf. And the balances that you purchase at the
outset are not impacted by any management costs assigned to you by any trustee, so you’re free of carrying costs,
and your tracking of the gold price is literally penny for penny, dollar for dollar.
So the only thing you need to overcome is the initial price structure on the bid and offer spread, which is pretty
minimal. Certainly in the case of Kitco Pool accounts it is less than 1% round-trip, and then there’s the interface of
being able to trade these instantaneously online or via the telephone, and within 48 hours being cashed out if that’s
what you need to do, or switch to another metal, like silver. Or, switch to another currency; you can redeem your
gold into Euros, British pounds, or Canadian dollars.
I think none of those are doable with the ETF. And one of the more important features is definitely not doable
with the ETF, which is your ability as the holder of the Kitco or gold Rand to redeem your balances in physical
gold product, coins, small bars, and only incur a small fabrication or shipping cost. And that’s it. So converting to
physical is very easy with custodial gold, but not so easy with ETF; in fact, it’s not doable.
TGR: You mentioned that there is no management fee like you have with ETF, but there must be some type of
carrying cost to put it in a vault somewhere.
JON: Really, the only time you have a carrying cost for a custodial arrangement is if you choose the allocated
guise of ownership. Let’s say the Perth Mint Certificates – they actually have two flavors of the product. One is
unallocated where you don’t pay custodial fees, and your holdings are part and parcel of a large bar that is already
in a vault, that is already allocated out on pallets. So, you don’t have to pay any storage fees or any insurance fees.
But if you chose to segregate 50 coins and put them in a box with a label with your name on it, then yes, you
would pay about 1.5% per annum for storage, insurance, and audit. In consumer terms, that’s first of all
justifiable. You probably can’t do much better by opening your own private storage account with a custodian like a
bank or a Brinks or a similar arrangement.
So, that’s the attitude if you chose the segregation total allocation. GoldMoney, I think, basically subsidizes the
custodial charges, and although you pay something on the order of 1.2 grams of gold a year, that still amounts to
only $30 to $40. So, it’s still not a terrible cost to bear, provided that you also recognize that the alternatives that
people are thinking about as “safe” are really not safe. Taking coins or bars home and putting them in a bank safe
deposit box leaves you in a completely uninsured guise. You have no insurance on those boxes if something
happens at the bank, and yet people tend to believe that they’re safe with them – and even those boxes have $60 to
$70 or $80 charges per year.
So, there are ways to do this very efficiently and with no carrying costs, and really have only the small spread to
overcome. If you’re trading-minded, or even if you’re long-term minded, the balances that these products have
amassed are pretty substantial. The GoldMoney has grown to about $230 million to $240 million in five years.
Kitco has been around for a decade, and we really launched it after we had an actual website in 1995. By 1997 we
were in the custodial product business, and it’s definitely gone very nicely.
So, there are alternatives to taking the goods home. The three attributes that an investor of this insured orientation
that I have described would seek would be value for money, safety while in custody, and of course last, but not
least at all, liquidity – how easy would it be to sell when the price hits $850 or $900 or on a given Wednesday
when you feel like selling?
Gold coins, as nice as they are, or bars in your possession or in custody, can’t provide you those features because
there’s a definite difference in buying gold at 7% over market versus 0.5% over market and paying 1% or 2% for
storage or management fees and so on versus not paying anything and still have the safety of an insured vault. Of
course, there’s also the difference in having to pack, ship, weigh, and take the best offer for shipping back 20
Maple Leafs to some dealer far away versus picking up the phone and saying, “Hey, I’m done,” and 48 hours later
the funds are here. You’ve banked by wire, and you haven’t even left your house.
TGR: Right. How does one get into the Kitco Pool fund?
JON: Kitco Pool is extremely easy. Basically, it is just signing up online or on the phone. You don’t even have to
fund the account initially; you can just open it and decide when. There are no minimums required in terms of
purchase amount, which means you can embark on a system on an accumulation plan, which is very popular.
People have a regular monthly purchase plan, and they literally use it as a savings account. It’s a very good
strategy because you can cost-average over long periods of time, and obviously if you get more ounces at a low
price and fewer at higher, you will probably end up better off than the fellow who tries to hit the top and the
bottom, thinking, “Ah, ha,” and they may miss it by 5% or 10%. And so it gives you that flexibility.
It also gives you the ability to switch from one metal to another or to redeem for another currency if that is your
desire. You can take payout in dollars or in other currencies. Checking balances and all of that is as easy as with
your online checking. You just log in, use the main password, and see exactly what you have and know what it’s
worth any time, day or night.
Basically the same with the GoldMoney, except for some limitations – you can only do it by Internet, not by
phone, and some of the payment methods that Kitco accepts are far more flexible. GoldMoney really only does
wire transfers – period.
But other than that, they’re both digital forms of gold, and they’re all backed by physical gold in actual vaults on
actual pallets. Perth Mint is a little bit different because there the interface. The actual evidence is a certificate that
you receive and that you hold onto. It proves that you hold gold at that mint. Its minimum is $10,000; the
subsequent minimum is $5,000. So it’s designed as a long-time accumulator with a little bit higher net worth,
perhaps. But it’s also ideal for people who say, “You know what? I really like the appeal of Perth; it’s a century-old
mint – 109 years, actually – in a very remote urban area on earth, thought to be very safe from all sorts of
trouble." And because of the ownership of this mint by the provincial government of Western Australia, you
effectively have a dual layer of insurance and guarantees that would tend to make you hold in the event of some
mishap at the corporate arm, which is the mint. And that’s additional peace of mind for a buyer.
TGR: Very good. I think we’ve covered quite a bit. We really appreciate your time and your insights.
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| Gammill Numismatics, LLC presents "The GN Newsletter" Current Events and Collector News |