Les Jones

More signs of constricted supply in physical gold

Monday, July 20th, 2009 | Economics |

SeekingAlpha - The U.S. Mint Again Suspends Gold Coin Sales: Is It Really Out of Gold?

I may have missed one or the other suspension of gold coin sales by the US Mint. But here we go again: Checking the online store of the US Mint I came across notices of delays and suspensions with golden Eagles and Buffalos, with waiting times ranging from ‘weeks’ and to ‘await further notice’.

The US Mint press room has entirely omitted this confirmation about the tightness of the bullion market which enjoys upward momentum thanks to the thousands of big problems the world faces.

Wall Street Journal - Sales of Silver, Gold Coins Surge:

The U.S. Mint said it sold 680,500 one-ounce American Eagle gold bullion coins in the first six months of the year. By contrast, in the first half of 2008, the Mint sold 180,000 one-ounce Eagle coins and 67,000 American Buffalo coins. (Release of 2009 Buffalo bullion coins is planned for later in the year, the Mint said.)

Meanwhile, Comex was unable to deliver physical gold to settle a futures contract and had to resort to delivery of paper gold.

As you may have heard recently, the Comex has asserted their right under their rules to deliver the equivalent paper interest in Exchange Traded Funds such as GLD in lieu of the delivery of physical bullion for those standing for delivery under the rules of the commodity exchange.

Is GLD really the same as physical bullion?

“…it appears that a lot of investors believe and trust that investing in GLD is the same thing as buying physical gold bullion. A close reading and analysis of the GLD Prospectus, however, reveals that investing in GLD is drastically different from owning gold. This analysis will show why GLD is nothing more than another form of a derivative security which is loaded with counter-party default risk.”
Owning GLD Can Be Hazardous to Your Wealth

Here is a recent statement from Dennis Gartman who most often derides those he calls ‘goldbugs.’

“To finish, we do agree that recent decisions to allow for the “delivery” of ETF shares in the stead of actual physical gold against a futures position does cause us some concern. Indeed, it causes us some very real concern, for if we stand for delivery of wheat we expect to receive wheat, not paper. The same holds true for delivery processes on the COMEX, and if GATA and the “Bugs” have a complaint it is this new decision by the COMEX. On this, we’ll grant that the “Bugs” have something to complain about.” Dennis Gartman in The Gartman Letter

Paper gold is a certificate backed by gold in a vault. That’s how I own gold - in exchange-traded funds (GLD, GTU, and CEF) that I buy and sell inside my 401K retirement account.

Holding physical gold is almost always better than paper gold if you have a place to store it. In GLD’s case one concern is whether it’s leasing out some of its gold, essentially double-counting it. See Owning GLD Can Be Hazardous to Your Wealth. Because of those concerns I now have less in GLD than I do in the other two gold ETFs, though GOLD has performed better than the other two since I jumped in.

Something else nice about the other two gold ETFs is that they’re based in Canada, so in the event of something crazy happening in the U.S. like gold confiscation or a gold windfall profits tax they may offer more asset protection. If that last part sounds paranoid, bear in mind that FDR actually did confiscate private gold bullion in 1933 at $20 an ounce and then turned around and re-priced it at $35/ounce. That executive order likewise outlawed civilian gold bullion ownership, which didn’t resume until 1974.

Tags: gold, paper vs physical

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