(Mike Maharrey, Money Metals News Service) I’d like to congratulate CNBC on finally noticing gold!
It only had to trade above $3,700 an ounce to get the big network’s attention.
While I have to give CNBC credit for finally recognizing that gold might be a good investment (after all, it’s only up 82.9 percent since January 1, 2024), I’m not particularly impressed with their reporter’s gold investing advice.
The CNBC report by Jessica Dickler notes that gold has notched nearly 3-dozen record closes and is up around 40 percent this year. You’d think she’d have taken notice a little sooner. I’m just saying. (To be fair, I did find a very similar article by Dickler published on Sept. 6, but nothing earlier than that.)
I’m using a bit of hyperbole when I suggest that CNBC hasn’t reported on gold at all. But the fact is, the network hasn’t paid nearly as much attention to the meteoric run by the yellow metal as one might expect. And this is true of all of the mainstream financial networks. When they do report on gold, it’s generally begrudgingly, and the stories almost always include bearish sentiment, reminding viewers that the metal is probably oversold and will probably go down soon.
To Dickler’s credit, she acknowledges the bullish fundamentals, noting that, “As a safe-haven investment, gold tends to perform well in low-interest-rate environments and during periods of political and financial uncertainty.”
There has certainly been plenty of political and financial uncertainty. And with the Federal Reserve pivoting toward a lower interest rate environment, even the mainstream can’t ignore the appeal of gold. It doesn’t take a degree in economics to understand that falling nominal interest rates and stubborn price inflation will drive real rates lower – perhaps even negative.
Dickler also quotes a Wells Fargo analyst who said he expects “ongoing gold purchases by global central banks and heightened geopolitical strife to support demand growth for precious metals.”
Not So Great Advice
So far, so good.
However, in my view, Dickler goes off the rails with her advice on how to invest in gold.
“Most experts recommend getting investment exposure to gold through an exchange-traded fund that tracks the price of physical gold, as part of a well-diversified portfolio, rather than buying actual gold coins or bars.”
She’s right. “Experts” tend to recommend ETFs instead of physical gold. Of course, most experts also think putting a handful of politically connected PhDs in charge of running the financial system and setting the price of money is a good idea, too, so we might want to take the advice of “most experts” with a grain of salt.
In fact, there’s nothing wrong with investing in ETFs, but it’s important to understand that you don’t actually own any gold.
A gold ETF is backed by a trust company that holds metal owned and stored by the trust. In most cases, investing in an ETF does not entitle you to any amount of physical gold. You own a share of the ETF, not gold itself.
So, why would anybody invest in an ETF instead of physical metal?
Convenience.
ETFs are relatively liquid. You can buy or sell an ETF with a couple of mouse clicks. You don’t have to worry about transporting or storing metal. In a nutshell, it allows investors to play the gold market without buying full ounces of metal at the spot price.
Since you are just buying a number in a computer, you can easily trade your ETF shares for another stock or cash whenever you want, even multiple times on the same day. Many speculative investors take advantage of this liquidity.
However, while a gold ETF is a convenient way to play the price of gold on the market, you must remember this key fact – you don’t actually possess any gold.
You own paper.
And you don’t know for sure the fund holds all of the gold advertised. This is especially true when the fund sees sudden inflows. In such a scenario, there have been documented cases of difficulties or delays in obtaining physical metal.
SPDR claims it backs its entire $52 billion market capitalization in physical bullion. It probably does. But good luck proving it. You can’t go inspect the gold in their vault. And they certainly won’t give you any of the metal you’re indirectly invested in if you call them to ask for it.
The fund managers say they have gold, and you’re taking their word for it.
So, while investing in an ETF may be more convenient than dealing with physical bullion, you are introducing significant counterparty risk.
On the other hand, owning physical gold comes with very little counterparty risk. If you buy gold coins or gold bars and store them in a safe at home, there isn’t another party involved. You know exactly how much gold you have and where it is. There is no other party to default, commit fraud, or make a mistake.
If you store your physical gold in a depository — either in segregated or allocated form — you maintain direct ownership of the metal. While it’s true you are relying on a third party, your metals always remain your property.
Dickler quotes an expert who asserts that “it’s much more inefficient to own physical gold” due to higher transaction costs and storage considerations.
In fact, ETFs deal with the same considerations and pass the costs on to the investor. So, when you invest in a gold-backed fund, you’re still paying these costs. Instead of billing you directly, fund managers deduct the costs from the fund’s assets on an ongoing basis. The ETF sells gold periodically to pay the fees, causing the fund’s net asset value (NAV) to slowly decline relative to the spot price of gold over time. You won’t get a separate storage or handling bill, but the costs are very real — they’re just embedded in the ETF’s price and performance.
So, if you hold the ETF long-term, your return will lag slightly behind the raw movement of gold prices due to the ongoing storage and management costs.
The bottom line is that there are plenty of legitimate reasons to invest in ETFs, but they are not a substitute for owning physical gold.
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
