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The illusion of owing Gold through some ETFs and Funds

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Popular ETFs like GLD are perceived as providing investors ownership of gold bullion. But is this is an illusion?

By Nick Barisheff

Special to the Financial Independence Hub

Gold-backed exchange-traded funds (ETFs) and similar products account for a significant part of the gold market, with institutional and individual investors using them to implement many of their investment strategies without considering the true risk associated with many aspects of holding non-tangible assets.

Gold ETFs are units representing physical gold in paper or dematerialized form, which is very different from owning physical gold. According to the World Gold Council, global gold-backed ETFs added 298 tonnes, or US$23 billion, across all regions in the first quarter of 2020[1]. Total ETF holdings amounted to 3,296 tonnes, representing US$179 billion. The largest ETF is SPDR Gold Shares (GLD) with 1,048 tonnes.

Many investors and financial advisors may be surprised to learn that owning shares in a gold ETF is not the same as owning physical gold. As one of the largest ETFs, GLD states in its prospectus: “ … designed to track the price of gold.” Is it wise to choose convenience over holding physical gold?

Since their introduction in 2003, gold-backed ETFs have transformed the gold investment market into an illusion, diverting attention from ownership of physical gold. This is like a magician that has you focused on a distraction while they perform a trick.

When you buy a physical asset, such as real estate, a car or a boat, a great deal of effort is made to ensure that legal title to the asset is transferred to the buyer. This generally involves a specific description of the asset – the make, model, colour and serial number, in the case of a car. In addition, the seller typically warrants that they have free and clear title, that there are no encumbrances and that they have the legal right to convey title to the buyer.

Surprisingly, when it comes to acquiring gold, investors tend to ignore these basic fundamentals and instead focus on the storage costs and management fees; they don’t give a second thought to actual legal ownership. What good is it to save money on the storage costs if you don’t have legal title to the gold? Many gold transactions, such as futures contracts, certificates, and ETFs, are nothing more than paper proxies or derivatives of gold. They do not represent legal ownership of gold. These proxies may work as planned during normal market conditions but may fail under stress, when investors need the safe haven of bullion the most. I have always said that if you aren’t paying reasonable insured storage fees for allocated bullion, then in all likelihood you don’t own any gold at all.

For example, if we were to place a bet on tomorrow’s gold price, and we agreed to settle in currency, then we wouldn’t need any actual gold as long as each of us had the ability to pay if he/she lost the bet. However, this isn’t an investment, and is totally dependent on the credit worthiness of the counterparty. It defeats one of the most important attributes of allocated bullion: NO COUNTERPARTY RISK.

ETFs have significant counterparty risk on many levels

In the marketing materials of the GLD ETF, the first thing to note is that it is referred to as a “Tracking Vehicle.” There is nothing mentioned about owning gold. On the GLD website, it clearly sets out the objective of the Trust. Unlike physical gold, ETFs have counterparty risk, because there’s a possibility that the other parties, such as the Authorized Participant (AP), the trustee or others, may default or fail to uphold their part of the agreement.

I have spent many years with lawyers, drafting prospectuses and legal agreements. As everyone can appreciate, lawyers are always careful and precise with the specific language in all legal documents. As a result, it is important for each investor to carefully read all the documents associated with a transaction in order to understand the objectives of the ETF.

Pay strict attention to the wording in the Regulatory Documents

With the recent increased popularity of ETFs, many investors assume they are like open-end mutual funds, but with much lower management fees. They never question why the fees are lower; they simply assume that Wall Street has become generous and wants to provide cost savings to public investors.

In an open-end mutual fund trust, such as the BMG mutual funds, the fund manager receives the investor’s contributions and then purchases the appropriate bullion according to the mandate of the fund. Similar to a stock transaction, the Custodian (Scotiabank, in BMG’s case) issues a Trade Record Sheet, specifying the bar being transferred to the fund by refiner, serial number, exact weight and purity to three decimal places. Every month, the Custodian provides a list of bars held in custody for each fund by refiner, serial number, exact weight and purity. This monthly document is signed by an officer of the bank and is posted on the BMG Group Inc. website.

The holdings are audited annually by the BMG Funds’ independent auditors (RSM Canada LLP).

While open-end funds have to incur a number of expenses, as mandated by regulatory authorities, the investors will benefit from the economies of scale in both purchasing the bullion and storing the bullion on a fully insured basis, as well as the reduced legal and accounting costs. Continue Reading…

Retired Money: You can still count on 4% Rule but there are alternatives to settling for less

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MoneySense.ca; Photo created by senivpetro – www.freepik.com

My latest MoneySense Retired Money column looks at that perpetually useful guideline known as the 4% Rule. Click on the highlighted headline to access the full article online: Is the 4% Rule Obsolete?

As originally postulated by CFP and author William Bengen, that’s the Rule of Thumb that retirees can safely withdraw 4% of the value of their portfolio each year without fear of running out of money in retirement, with adjustments for inflation.

But does the Rule still hold when interest rates are approaching zero? Personally I still find it useful, even though I mentally take it down to 3% to adjust for my personal pessimism about rates and optimism that I will live a long healthy life. The column polls several experts, some of whom still find it a useful starting point, while others believe several adjustments may be necessary.

Fee-only planner Robb Engen, the blogger behind Boomer & Echo, is “not a fan of the 4% rule.” For one, he says Canadians are forced to withdraw increasingly higher amounts once we convert our RRSPs into RRIFs so the 4% Rule is “not particularly useful either … We’re also living longer, and there’s a movement to want to retire earlier. So shouldn’t that mean a safe withdrawal rate of much less than 4%?”

It’s best to be flexible. It may be intuitively obvious but if your portfolio is way down, you should withdraw less than 4% a year. If and when it recovers, you can make up for it by taking out more than 4%. “This might still average 4% over the long term but you are going to give your portfolio a much higher likelihood of being sustainable.”

Still, some experts are still enthusiastic about the rule.  On his site earlier this year, republished here on the Hub, Robb Engen cited U.S. financial planning expert Michael Kitces, who believes there’s a highly probable chance retirees using the 4% rule over 30 years will end up with even more money than they started with, and a very low chance they’ll spend their entire nest egg.

Retirees may need to consider more aggressive asset allocation

Other advisors think retirees need to get more comfortable with risk and tilt their portfolios a little more in favor of equities. Adrian Mastracci, fiduciary portfolio manager with Vancouver-based Lycos Asset Management Inc., views 4% as “likely the safe upper limit for many of today’s portfolios.” Like me, he sees 3% as offering more flexibility for an uncertain future. Continue Reading…

Is value investing still of value?

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By Steve Lowrie, CFA

Special to the Financial Independence Hub

I’ve often posted blogs about the perils of trying to time the market or pick individual stocks. I hope these posts have helped you stay invested as planned during this year’s uncertainties. But what about the risk factors in your stock portfolio: especially the value factor?  Should you try to time these?  Or are you also maintaining a disciplined allocation to them, also according to plan?

Value-added, with a catch

First, what is the value factor? Value stocks seem undervalued compared to their growth stock counterparts, as measured by stock price vs. various valuation metrics (such as book value, earnings, or cash flow). Historically, investors who have held a heavier allocation to value stocks have earned higher returns, beyond what broad markets have delivered.

But to capture the value premium over time, investors have had to tolerate the sometimes-lengthy periods when value underperformed growth. 

The catch is, value investors have had a tough go of it during the past decade and in particular the past 3 years.  Although very short-term, some are wondering if the tide is starting to turn,  given some moderate value outperformance in the US and some significant value outperformance in Canada and non-US markets since mid-April.  Even so, the long stretch of underperformance has led some investors to question whether the value premium still exists.

Value glasses, empty and full

Without diving too deep, there are two broad ways we can view the value premium today. A “glass half empty” analysis might conclude a decade-plus pattern of underperformance means it’s gone for good. However, a “glass half full” type knows there is plenty of logic and evidence to suggest that rumors of the value premium’s demise are probably premature.

Still as risky as ever:

Ever since Nobel laureate William Sharpe came up with the capital asset pricing model in the 1960s, it’s been pretty clear that investors demand extra compensation for taking on extra investment risks. As risky as value stocks have felt lately, it’s certainly still logical to expect them to eventually pay off in higher returns.

Like a swinging pendulum:

Put another way, will returns that have swung to one extreme eventually revert or swing closer to their long-term averages?   As Dimensional Fund Advisors describes, “It’s reasonable to expect that securities with lower prices relative to fundamentals should have higher expected returns.” In other words, the riskier (lower-priced) value stocks become relative to growth stocks, the more (not less) likely a correction will eventually occur.

The bigger they are:

Some say huge tech stocks have now become the best source of expected return.   Continue Reading…

How to cut your tax on capital gains — and keep more of your money working for you

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TSInetwork.ca

In Canada, tax on capital gains is at a lower rate than tax on interest. You can take advantage of that — and substantially cut your tax bill — by structuring your investments so that more of your income is in the form of capital gains.

(Our free report, “Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities,” is packed with simple strategies you can use to shift more of your income to capital gains.)

You have to pay tax on capital gains, specifically on the profit you make from the sale of an asset. An asset can be a security, such as a stock or a bond, or a fixed asset, such as land, buildings, equipment or other possessions. However, you only pay tax on capital gains on a portion of your profit. The “capital gains inclusion rate” determines the size of this portion.

About 20 years ago, the Canadian government cut the capital gains inclusion rate from 75% to 66.6% and, within a few months, to 50%. This cuts tax on capital gains, and had the effect of lowering the overall rate you pay on capital gains to one-half of what you would pay on income or interest.

By The Numbers: Tax On Capital Gains

For example, if you buy stock for $1,000 and then sell that stock for $2,000, you have a $1,000 capital gain (not including brokerage commissions). Continue Reading…

Understanding the Cost of Title Insurance – Policy Coverage & Need

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By Rebecca L. Clower

Special to the Financial Independence Hub

For a real estate deal, Title insurance plays an essential purpose: it covers sellers and investors from financial damages arising from errors or conflicts not detected before the property was sold.

If a purchaser and seller sign a sales contract for a house, the buyers appoint the title officer to conduct a research of any liabilities, duties, disputes or disagreements which are to be settled before the home is transferred from one party to the other in the local jurisdiction’s land records.

But consumers can opt to purchase title insurance from a renowned insurer as an extra measure of security.

What is a Title Insurance policy?

A title insurance policy protects you from title issues such as a poorly registered act, an overdue contractor’s lien, or an unwanted successor. After the title examiner researches, divorce decrees, court rulings, and other public documents, title insurance policy shall be provided to ensure that there are no title disputes.

The title insurance of the lender is mandatory if you fund your home with a hypothec and covers the interest of the ender for your lending life. The strategy for a lender is related to the amount of the loan (not the buying price). Furthermore, the title insurance policy of an investor covers your property for as long as you own it, and the purchase price is the basis.

How much does it cost?

When buying a lender’s and the policy of the owner together, the overall cost of title insurance policy is around 0.5 per cent to 1 per cent of the purchase price. According to December 2019, the amount of fees applies to the premium from $1,372,50 to $2,745 [US$] for a medium-priced home of $274,500. The larger your size, the more likely you will be to pay for title assurance, although tariff insurance costs differ by region.

In respect of a refinancing loan, the cost of the title policy of a new lender is closer to 0.5% of the balance. You do not need to purchase another if you refinance the title policy of an owner when buying your home, as long as your own coverage is in place.

Factors affecting the cost

In general, title insurance plans, unlike many other specific insurance plans (such as car insurance, life insurance, and household insurance), require a single, one-time payment at or before the closing date of a settlement. If the insurer agrees to break payments into more manageable monthly installments, recurring payments for the title policy are very unusual.

Insurance charges are typically classified into two general categories: premiums and service charges. The cost of title insurance may be further divided within each group, depending on the quantity and form of work needed to complete the program.

  • Premiums

To some degree, the maximum premium paid on a standard title insurance policy depends on the valuation of the underlying asset. However, since most of the costs cover pre-transfer research – title quest, testing, and cure of defects – property value is not the priority.
Continue Reading…

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