Why I’m not selling my physical gold

Gold: hang on to the physical stuff

When I first bought gold – way back when – I bought physical metal, mainly in the form of old sovereigns.

I did this for three reasons.

First, because, being legal tender, they’re exempt from capital gains tax.

Second, the coins were all Victorian. Despite being over 100 years old, they were selling at little more than the value of their bullion content. Rightly or wrongly, I figured that one day, being antique, they might fetch some kind of premium or ‘numismatic’ value.

Third, and most of all, because I know what I’m like.

What do I mean by that?

A fool-proof way to protect yourself from over-trading

I bought gold coins deliberately, because I wanted to have something that would not be easy to sell. I couldn’t just click on a mouse. I would have to travel miles and miles to the distant wilds of the north, find the tree ten paces north of where my hoard is buried, dig it up, and then take it in to a bullion merchant.

I did this to prevent myself from selling too early, or being shaken out of my position. It was an insurance against myself.

Earlier in the year, I said that if gold breaks below $1,500 an ounce I would sell, because I didn’t want to give back all the gains I had made over previous years. But in April, when the gold market plunged through that level – falling by over $200 in just a few days – the market moved too fast for me to do anything. In fact, I still haven’t got my act together to dig up said gold and sell.

What I’ve done, unwittingly perhaps, is to turn myself into what is known as ‘a strong hand’.

I may be quite easily influenced – most of us are – but the fact is that selling my gold would be such an undertaking, that this is gold that is very unlikely to ever come to market. I’m going to really need the money for something else before I sell it. In fact, I’ll probably just end up passing it on to my children.

But the guy who’s spread-betting gold, the guy who’s buying and selling futures and options, the guy who’s trading exchange-traded funds (ETFs) – these are all ‘weak’ hands because the positions are so tradeable.

I remember one occasion when I used to spread bet gold. I walked out of my house, resolutely determined to stick with a position. By the time I’d got into the car I was on the phone to MF Global (yes, them) telling them to sell. That’s not what you’d call a strong hand.


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Gold is moving from ‘weak’ hands to the strong

I’m saying all this for a reason.

Since the end of 2012, a huge amount of gold has been sold. I’m going to ignore all the derivatives – the options, the CFDs, the spreadbets and the futures – because that is not real gold.

But the gold sold by the ETFs is real gold. And the ease with which one can buy and sell it means that it is ‘weak hand’ gold – even if the person who bought is strong-minded and resolute, it’s easy to evacuate in the grip of panic.

Since mid-February, about 550 tonnes (around 19 million ounces) of gold have flowed out of ETFs, according to Natixis analyst Bernard Dahdah. Barclays Capital has the number at 500 tonnes. That’s just under a fifth of current annual production (around 2,600 tonnes – a number which is going to be a lot lower next year).

The largest ETF of all, GLD (NYSE:GLD) – which was at one stage not just the largest gold ETF by market cap, but the largest ETF of all – has since December 2012 seen its holdings fall by nearly 400 tonnes, from 1,353.35 tonnes to 965 tonnes (around 31 million ounces).

For every seller, there’s a buyer. All that physical gold has been bought by someone.

It’s hard to know exactly who. Some funds, such as David Einhorn’s Greenlight Capital, are believed to have sold ETFs and rolled their position into allocated physical. Central banks are net buyers too.

And, of course, many retail buyers, particularly in Asia, have increased their positions quite dramatically since April, swamping bullion dealers.

Although the most recent sell-of has not met with the same volume of physical buying, in April, Chinese consumption was 137 tonnes, double a normal month. In other words, the incredible volume of gold that has traded hands over the last few months has seen a transfer from ‘weak’ hands to ‘strong’ – and probably from west to east as well.

Even central banks can be considered strong hands. Despite our own experience with Gordon Brown, central banks do not sell gold lightly. It takes meetings and approvals and goodness knows what else. It’s not something that’s done at the click of a mouse.

Not all ETF gold will get sold. But more of it will be, if gold’s declines continue. If all of GLD were liquidated and bought by Asians, 31 million people would have to buy an ounce each; or 3.1 million people ten ounces. It would take a while – a year maybe – but the numbers aren’t so impossible. China’s imports in 2012 were 27 million ounces; India’s 30 million (a number which will fall in 2013 due to its new import taxes).

What happens when people need gold again?

Meanwhile, we have the issue of mining. The dreaded words ‘care and maintenance’ are appearing more and more frequently across mining company news releases. Mines are being shut down the world over. Funding has dried up. Projects are being axed.

Even though industry figures suggest that it costs about $1,200 on average to get an ounce of gold out of the ground, the reality is quite different, as Mark Mahaffey of Hinde Capital argues so eloquently on his blog. When you factor in all costs, including cock-ups, the break-even price on gold mining – ie the price at which companies are left with free cash flow – is $1,750 per ounce.

Most gold miners cannot survive for much longer without dramatically higher prices. In other words, production is going to fall by a lot.

However, there will come a time – maybe not next week, nor even next month – when people are going to want gold again. Perhaps we’ll see a fresh spate of bank runs, triggered by the end of quantitative easing. Perhaps all the printed money will finally hit the real world and give us consumer price inflation. Or perhaps the People’s Bank of China will finally announce how much gold it has, and the number will be surprisingly high.

I don’t know what the trigger will be. But suddenly all that gold that was sold is going to be in strong hands: including idiots like me who never get round to digging up their stash.

What’s more, new supply from mines will barely exist. What happens to the gold price then? Those kinds of situations are the foundations on which bull markets are built.

For now, I’m not convinced this sell-off is done. We may even have to go back to $1,050 or, heaven forbid, $680. Gold is so incredibly loathed and unwanted just now. A strong downtrend is in place, and counter-trend rallies are anaemic.

But I don’t know for certain where the end will be, and nor does anyone else – it could be that the selling is all done already. Meanwhile the foundations for another bull market are slowly falling into place.

So, my current view is, given the expense involved, the time, and the magnitude of this bear market so far, it’s just not worth selling your physical gold unless you really need to. Better to carry being a strong hand.

Finally, a quick word on my book, Life After The State. I’m delighted to say that, finally, after too long, it is making its way to the lay-out people and the printers. But you can still order one of the special first editions, and get your name printed inside. Many thanks!

Editor’s note: If you’re interested in holding gold as insurance against financial catastrophe, I think you should see what our ‘City Insider’ Tim Price has to say. An asset manager in charge of more than £1bn, Tim believes there are three major threats to your wealth right now, with gold being one of the assets you should hold onto for dear life. You can read his free report about it here.

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  • Daniel Victor

    There are various companies that sell physical gold,and sovereigns minted after 1837 are CGT free.However,the mistake that the sellers make is in not offering a transparent,two-way market – they will sell you sovereigns,but they do not make it clear whether and at what price they will buy them back.That does not inspire confidence.

  • NVP

    hey all

    forgive me but i’m a trader …….so i’m never a great fan of buying or holding anything thats losing value hand over fist so far this year …..perhaps when it turns …..or when the USD starts falling

    NVP

    • Inquisitor

      So you buy when the price is high, or what? I don’t get your point.

  • crickster

    Smell a little bi desperate, if you keep your Gold long enough, it will no doubt come back up, could be in 5 -10 years ?

  • Rabster

    Oh dear oh dear oh dear !
    Instead of a meaningful article we get another diatribe of revisionist nonsense to continue the ‘arse cheek shuffling’ that began with last weeks article on gold .
    As a keen reader of Dominic’s articles (I even PAID for his reports !!) I waited patiently to hear from Dominic since golds rapid slide. But MW’s resident ‘Gold Guru’ was obviously too busy plugging his book to advise gold investors like myself as to what to do as gold rapidly declined.
    And now we finally have the answer ….sit on your losses till Armageddon!!!
    This from a man who didn’t/ couldn’t even follow his own advice of selling if the price went below $1500!!!
    So we must all await another major calamity before we can console ourselves with the knowledge that whilst all around suffer misery at least we have recovered from our losses .
    And its seems our Gold Guru is now an unwitting ‘strong hand on gold’ which he can now pass down the generations. I didn’t realise MW specialised in intergenerational, extreme long term investing.
    Holding gold coins …what a happened to your advice about ETFs and Gold Miners?
    What do you suggest………. that those of us who followed MW advice at $1200 plus sell and buy gold coins !?
    Any resident of the third world will tell you about holding gold coins and passing it down to your children ….they’ve been doing it for centuires. We don’t need this sort of advice from a 2nd rate actor, 3 rd rate voiceover man and 4th rate ‘Gold Guru’.
    Dominic you sound delusional …………advising on the world as you’d like to see it rather than how it is .
    I used to read MW for the clear , logical , evidence based writing but now I’m increasingly reading it for the comedic value !!!

    P.S. And ref Editor’s Note to the editor. Please don’t pass us for one set of nonsense to another . I admired MW but with your moving reading from Dominic “hold your gold coins “ Frisby to Tim “gold as insurance” Price strategy you are devaluing further a once well respected investment journal.
    Get your act together MW

  • Pusser

    I am wondering if the title of the article should be “Why I can’t sell my physical gold”.

    From things I have read it appears Bullion sellers do not want to be Bullion Buyers and I think I can understand their sentiment at this moment in time.

    I am also wondering why discounts are being offered on real gold; at least advertised as such if the real gold market is so booming.

    Personally, I have at last fallen into a camp which believes not much is going to happen on the gold front as it didn’t happen when major probs hit the world one after the other and gold took sod all notice.

    But I cannot stop looking at its prices though several times a day. How sad is that?

    • Inquisitor

      I think Peter Schiff has discussed this to death. The current crisis is not the big one. There are still other ‘sovereigns’ to run to, and CHina is still in a position where it has to subsidise the US’ trash. When that situation is over, do you want to be left holding paper, or stocks comprising part of the overvalued stock market, and if so, why?

    • Cilurnum

      Discounts offered on physical gold? Where do you get that tosh?

      I also don’t know what makes you think gold took ‘sod all notice’ when it rose several hundred percent in the last ten years? Maybe I imagined it?

  • 4caster

    Yes, Dominic is the adviser who predicted £1,600 (yes, pounds sterling) per ounce by the end of next year. I think I commented on his article of 20th March 2013. But for some strange reason it’s disappeared from the Money week website. I wonder why!
    You can make a nominal profit from just about any non-perishable investment if you buy and hold for long enough. You would have needed 25 years if you bought gold in 1980.
    And as for burying your gold ten paces south of a tree at the other end of the country, I trust this is a joke. If you tell your nearest and dearest, make sure you never travel in a car or plane together. If you tell anyone else, it won’t be there when you return.
    My advice is to keep it in a bank vault, and if you are worried about confiscation, keep it in an overseas bank vault in a reliable country such as Australia, Switzerland or Singapore.

    • Inquisitor

      Yeah, because it isn’t like they’re not subject to violent monetary-led boom/busts…

      Gold is NOT an investment good. You know what?

      Want to sell it? Sell it. Don’t want to buy it? Don’t. The less people buying gold the better for those of us who realise the current economic situation is utterly untenable.

      In Bernanke &co (and their media cheerleaders) we Trust.

      • Peter E

        its sad to see how little research people do on their own.
        Do they actual think that the US, UK, China and Japan have solved their economic woes.

        This is just a lull in the storm.

        Watch when the biggest market of them all starts to normalise as interest rates go up everyone will be scrambling to buy gold and I will swap my growing hoard for more tangible assets.

  • 4caster

    Most physical gold is bought and sold in London. My understanding of the “gold slam” of Friday 12th April 2013 is that the plunge was driven by selling in the June futures market. After testing the market about midday UK time with a 122.4 tonne sell order, a large investment bank later sold some 400 tonnes, worth some $2 billion, after the London market had closed. And others joined in the rout. Actually this is small beer compared to central banks’ buying of nearly 32,000 tonnes in 2012.
    But the biscuit for timing is taken by Simon Popple. He chose the very day of that plunge to advertise his “rare gold opportunity that could double your money in the next 12 months ….. the kind of opportunity people wait entire lifetimes to come along.” His advice was: “Make your move now, or you could regret it forever.”

    • 4caster

      Regrettably I need to correct this posting.
      Nearly 32,000 tonnes was the total amount of gold claimed to be held by central banks at the end of 2012, not the amount they bought in 2012, which was 534.6 tonnes according to IMF figures. I was misled by a bar-chart from Hard Assets Alliance, carrying the label “Central Banks Loading Up on Gold over the Past Five Years”
      The sale of some 522.4 tonnes in a single day is certainly not small beer!

  • Anonymous

    [This comment has been removed.]

  • Cilurnum

    Dominic, if you believe that ETFs are real gold then you’re not the expert you think you are. Everyone worth their salt in the precious metals world knows that there are many, many times the gold on paper as there is physical. When Kyle Bass asked what would happen if 4% of people asked for physical delivery of their gold the answer was ‘Price will solve everything’. I’m afraid Dominic is yet another panicky western investor pouring over the spot price without truly comprehending what’s going on behind.

    We’ve had a deflationary period where losses have been stemmed by people selling off their gold. Why do you think there are pawnbrokers and ‘Sell your gold’ shops everywhere you look these days? They want you to sell cheap.

    I’m not entirely sure why I should feel devastated over my non-existent losses since I started buying in 2005 as it takes a good five to ten years to let gold, and silver for that matter, work themselves out but unfortunately most people just can’t get that through their thick skulls. I went through the price dips of 2006 and 2008. We all know what Carney is going to do, what the ECB will have to do and that QE ending in the US is one massive joke. It’s 2008 all over again, except on a bigger scale. Get prepared.

  • Quercus

    On 20 April 2013, David Schwartz, in the FT stated, “Something has changed in the way gold reacts to economic and political challenges”.

    Back in 1933, at a time of economic crisis, President Roosevelt forced U.S. Citizens to sell their gold at $20 an ounce – and then subsequently revalued the metal to $35.

    Clearly, the Central Banks wish to preserve confidence in their fiat currencies and a rising gold price contradicts this.

    Is there an element of market control in all of this?

  • GFL

    I don’t want to kick a man while he is down, but is the premise of this article, gold is going up because those that hide it in their garden will never sell?

    • Rabster

      The premise of this article is any or all of the following;
      1) we got it wrong on gold and failed to call the top but can’t admit that (not whilst we try to make money from Gold Plan newsletters, which incidentally I have previously brought, so lets change our tune to gold as a strong hand long term investment .
      2) lets publish something from our ‘resident gold guru’ who say one things but does nothing .
      3) lets pay and publish something from our “I’ve got 70% of my money in gold” writer so he can pay his rent .
      4) let publish to up his profile and help him sell his book

      Pathetic ! MW , please regain your game , stop acting like the Financial Services Industry you so rightly criticise.

  • Colin Selig-Smith

    Gold/oil ratio is getting into “buy me” territory.

    http://www.macrotrends.net/1380/gold-to-oil-ratio-historical-chart

  • Quercus

    On 24 May 2013, Bengt Saelensminde wrote ‘One Important Gold Chart’ which is now on the Money Week Gold Home Page.

    In it he wrote, “The thought for to-day will be short and sweet.”

    “The short gold position has never been as large as it is to-day. And historically, every time the short action breached the 40,000 contracts level, gold has staged a very decent recovery – the green arrows on the chart. To-day’s short action is over 74,000 contracts…….”

    As indicated in [16] above, however, it would appear that, “Something has changed in the way that gold reacts to economic and political challenges”.

    It would be most helpful if Money Week were to review matters accordingly……!!

  • MN

    The comments are more interesting than the Article itself.. :)

  • Quercus

    Bengt Saelensminde’s article dated 24 May 2013, ‘One Important Gold Chart’, has been withdrawn from Money Week Gold Home Page to-day…………..!!

    Perhaps we could have an explanation for its fall from grace?

    • Moderator

      Quercus,

      Calm down. Bengt’s article hasn’t been “withdrawn”, it’s just been pushed down the page by more recent articles.

      It’s here: http://moneyweek.com/right-side-one-important-chart-about-gold-64124/

      There is no conspiracy.

    • FR

      Gosh… life goes on.
      This is starting to look like eastenders

      • gamesinvestor

        or an episode of Miss Marple more like.

  • Dilip

    Enjoyed reading the comments here, maybe Mr Frisby could address some of the criticisms in a future article.
    Thanks

  • Anonymous

    [This comment has been removed.]

  • SidBSP

    I’m all for keeping hold of physical gold and silver! Especially ones that are of significant meaning other than the value itself like the maple leaf, the eagle and I have actually come across dinar and dirhams for the first time (the Islamic gold and silver coin). I have actually reserved myself a seat at this seminar based on specifically trading gold and silver which I think might be useful for anyone interested in learning how to trade using their system. From what i have read up on it, it seems like an exceptionally good move for me to attend. Oh, and they are giving away silver coins to those who attend too! feel free to check it out at http://www.tcamastery.com. I’m all for sharing the wealth :)

  • Gamble100

    Hi, thank you for the articles. If I wanted to participate in buying/selling gold based on price swings then which instrument is considered to be best as far as costs are concerned? (GLD vs coins, etc.)

    • Quercus

      Coins have a large Buy:Sell spread, slow transaction time and really for medium term holding.

      For short term, suggest ETF Swiss Gold (LSE:SGBS) in USD currency and backed by physical allocation.

      Refer also David Stevenson’s FT Guide, “Exchange Traded Funds and Index Funds, 2010 at page 380 for alternatives.

      Refer also http://www.britishbulls.com/SignalPage.aspx?lang=en&Ticker=SGBS.L

      Current Recommendation on this site is “STAY SHORT”.

      But Market Outlook is “Alarm Bells Ringing”. “On verge of reporting an end to Bearish Phase and acknowledge ascendancy of Bulls”.

      Trust this helpful.

      But of course, as Harry Browne stated in his bestseller, “Fail Safe Investing”, beware all Forecasters since if they could foretell the future, they would be multi-billionaires……!!

      • Gamble100

        thank you. I am not in a rush to go long just yet. Last time I traded silver I bought bullion from Guernsey mint, stored it with them and sold back to them after 3 years. That way I avoided having to pay VAT. I am thinking about doing the same again. Not sure yet.

        • Inquisitor

          How do you rate their services and financial soundness?

          • Gamble100

            My experience was all positive.

            • Quercus

              Would be most interested to hear how you settled on Guernsey Mint, rather than say James Turk’s Gold Money, or Paul Tustain’s Bullion Vault?

              Presumably one should rate on financial strength, Buy:Sell spread, expense of storage, understandability of legal guarantees, references from others and remoteness from HMRC.

              Could you please expand a bit along these lines?

              • Gamble100

                You would find answers within their website content. Shoot them an e-mail for all other queries. Spread may be an issue at around £40 per kilo, storage is 0.5% per annum of total deposited.

  • Anonymous

    [This comment has been removed.]

  • Quercus

    Four articles on this subject come to mind:-

    24.05.13 – One important Gold Chart – B. Saelensminde.
    29.05.13 – Is the Gold Crash Over? – D. Frisby.
    28.06.13 – Has gold price turned the corner? – J.C. Burford.
    08.07.13 – Why I’m not selling my physical gold? – D. Frisby.

    To my mind, the first was unfortunate as it was lifted from elsewhere without adequate background, care and attention and with its conclusion shown to be premature.

    The second was appreciated since it emphasised that the trend was down and recommended that one didn’t fight the trend.

    The third, I thought was very helpful as it attempted to call the bottom in a logical chartist methodology, whereas the last has had a “mixed reception”, particularly the Editor’s note about holding as “insurance”.

    If stocks are to crash and gold top $10,000 as predicted by Albert Edwards of SocGen on 25.04.13 – http://www.cnbc.com/id/100672709 – perhaps Money Week should re-double their efforts on the Gold front on a more regular basis, taking full account of the bearish and bullish analysis, and moderate some of the marketing hyperbole elsewhere……?

    • Gamble100

      IMO if one was to glance on gold’s long term chart he would quickly see that gold has not yet retraced to 50% level (1100). That is the current magnet. Putting technicals aside I tend to agree with supporters of a quote “fiats are all in perpetual fall against each other”. We have no gold standards anymore, so people will unofficially bring it back as a hedge against rising inflation. I am not a gold bug btw.

    • Boris MacDonut

      You forgot Bill Bonner’s own chipping in with 27 June, “The Gold crash is good news” and 17 July, “Has Gold bottomed out?”

  • Anonymous

    [This comment has been removed.]

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