Still Interested in Getting Physical With Gold?

Includes: GLD, IAU, PHYS, SGOL
by: Zecco

By Richard Bloch

There are several funds available that track the price of gold (at least somewhat closely), but most don’t allow you to actually cash in your shares for actual gold. That’s why some investors prefer to buy gold bullion.

The Sprott Physical Gold Bullion Trust (NYSEARCA:PHYS), however, does make it possible to get the gold you own out of the trust and into your hands (or safe).

According to Sprott’s website (pdf):

The Trust invests in gold bullion, offers investors lower costs than traditional means of buying physical gold, and Units can be redeemed for physical gold bullion.

This redemption feature could be one reason why PHYS has sometimes traded at a significant premium to its gold value, although the fund was only launched about eight months ago.

Is this a good alternative to actually buying your own gold? That depends. If you do plan to redeem units of PHYS for gold, there’s a few things you need to know, per the fund’s prospectus (pdf).

You’re going to need a lot of dollars to get your gold

Sprott stores gold in what’s called London Good Delivery bars. Each weighs between 350 and 430 troy ounces (and must meet other criteria) per the London Bullion Market Association.

So you’d have to redeem at least enough shares for a minimum of 350 ounces, and that’s if Sprott happens to have one of the smaller bars in stock (they publish their bar list here). If gold were at $1,350 per ounce, that would be at least $470,000 worth of shares you’d need to redeem.

Delivery will cost you

Actually, you’ll need a bit more than $470,000 to get that 350-ounce bar. Sprott estimates that delivery in the US or Canada costs about $5 per ounce. That’s in addition to another $5 per ounce “in-and-out” fee plus a $50 administrative fee on top of that (sounds just like your bank, right?).

Does that include insurance? The prospectus doesn’t explicitly say one way or the other, so I’d assume not unless you get that confirmed in writing.

You won’t know how much gold you’ll actually get

Sprott must receive your redemption notice by the 15th of any month (or the next business day if the 15th falls on a holiday or weekend) to process it that month. But here’s a catch:

Units redeemed for physical gold bullion will be entitled to a redemption price equal to 100% of the NAV of the redeemed units on the last day of the month on which the NYSE Arca is open for trading for the month in which the redemption request is processed.

The price of gold could rise or fall in the roughly two weeks between your request and actual redemption.

And presumably if your notice isn’t received by the 15th of any given month, the redemption will be processed at the end of the next month.

Your gold may lose its luster

An official London Good Delivery bar stays “good” because those who keep track of it know where it’s been.

You can have your gold sent to a depository institution authorized to hold these bars, in which case it will “likely” retain its good delivery status.

On the other hand, if you have it sent to your house, it essentially becomes a hunk of yellow metal that you say is gold, but you don’t expect anyone to believe you, do you?

That means it will need to be assayed again (probably at your expense) to regain its good delivery status once again.

Don’t expect a smile

Bob Coleman posted an account of his experience in taking delivery of gold and silver from the COMEX exchange.

When you have armed guards show up at your doorstep with a shipment, they are trained to carry out a certain function. They are not there to greet you with a smile like a mailman or newspaper delivery boy.

I guess that’s better than having the neighbors hear, “Hi there! Here’s your 350 ounces of gold! Where would you like us to put it? We can bury it in the back yard if you want!”

On the other hand, an armored truck pulling up to your house would probably be a tip-off anyway.

So, still interested in getting physical with gold?

Disclosure: None