The Pillars of Commodities Investing

As an advisor your job is to know the most secure places to invest one's money. This difficult task only becomes more difficult when confronted with demands for an alternative investment.

Savers will always seek out hard assets after an economic calamity, such as the banking crisis. But beyond the gut-level desire for tangibility, and the comforting idea of supply/demand driving prices, many such investors are in truth looking for non-correlated assets that are liquid and easy to manage.

Currently, gold ownership has become an important part of the portfolios of many investors. This is because gold is a non-correlated asset that is very liquid. Its price tends not to follow the path of stocks, bonds or real estate. Gold is also very easy to get a price for at any time. The global market is open 24 hours, and turns over some $240 billion per day, second only to the biggest currency pairs. But in the not so distant past there were very few ways for private investors to access that market.

The primary form of investment over the last 40 years has been in physical form, meaning bullion coins and small bars. From the late 1980s there were also companies that offered certificate programs. These operate like a warehouse receipt, and would reduce the cost of gold ownership compared to those traditional "retail" units. But certificates also came with minimum investment and dealing quantities, plus much higher commissions than stock-market investors would expect.

The gold investment market saw several major events in the first decade of the 21st century. The first came with advances in technology, where the internet enabled people to compare different deals and then transact immediately. Improved security protocols, and the ownership of equipment to access the internet, has seen online trading increase exponentially. Smart phones, laptops, notebooks, iPads and the rest expanded the ability of merchants to offer their product to the public. This enabled many companies to spring up to serve public demand for alternative investments in forms that always existed but previously were more difficult to negotiate.

In the predominant gold products offered to retail investors, the internet has seen a flood of new entrants to coin and small-bar retailing. That has allowed some level of price competition, but even the advent of new technology did not solve the primary issue. When buying online for home delivery, the individual would still need to somehow secure the price and then ship or receive the product some days later. At this juncture the individual also then put themselves, their families and their homes at risk with gold on their property.

For securely-stored gold, the internet saw gold certificate programs come of age, with new entrants offering instant dealing in much smaller quantities, starting from as little as 1 gram at a time (currently $42). Innovation in the securities market at the same time period brought the launch of Exchange Traded Funds (ETFs) for gold. The largest of these is the SPDR Gold Trust (ticker: GLD) which is listed on the New York Stock Exchange. Gold ETFs enable investors to buy exposure to cash gold prices, without using higher-risk futures or options, and transact through the stock market. Storage costs and management fees can look high at 0.40% per year, although there has been some price competition on these rolling costs from the next largest US gold ETF, the iShares Gold Trust (ticker: IAU).

An ETF is a trust, so it is not direct ownership of precious metals. Many people when looking to invest in precious metals do not want to take secondary ownership. This would defeat the purpose of owning an asset outside of mainstream investment products and services. Gold ETF holdings in contrast are in the existing banking and financial services system. Hence there is the belief amongst some investors that buying through this avenue still puts you at risk in the case of a global banking or economic crisis.

Who are the companies that offer the services that provide what investors are searching for in gold investment? There are many companies that offer similar services. Very few provide what all advisors should search out for their customers. The criteria that must be met are what I call the three pillars of investing in commodities and are covered in part two of this series.

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