Owning Gold as wealth insurance is so widely accepted now as to make it a mainstream investment. A portfolio without Gold is like owning a home without insurance in a region where hurricanes are a normal weather event. The only remaining question facing an investor is what form of Gold to own and where to store it. The latter issue may be one not given sufficient consideration by investors. The question: Do you really know where your Gold is?
This researcher’s preferences are for coins, despite the premiums, and exchange traded Gold ETFs. If one has little or no expectations of selling the Gold and desires to take possession of the Gold, then some portion of one’s wealth insurance should be in physical coins. Beyond that basic amount of Gold, ETFs serve the investor well. An ETF has the advantages of an investment tool that is a combination of Gold exposure with liquidity. ETFs can be sold with the click of a mouse.
When one moves beyond physical possession of your Gold, some additional steps should be taken. We are talking about the situation where one chooses to have a depository or custodian hold the Gold investment. These basic steps apply to all forms of depository, from ETFs to businesses specializing in the sale and storage of Gold. These steps are forms of preventive medicine as we know of no Gold depository that is a concern.
When reviewing your custodian look for two things. First, many will present a report on their inventories provided by a firm specializing in verification of inventories. This inventory count is not, repeat not, an audit of the custodian.
In the inventory verification process a list of bars, for example, is provided by management to the inventory verification firm. They then determine if the bars in the vault match the inventory list provided to them by management. That process does not determine if the bar list is correct. It does not verify that bar list is the amount of metals that should be in the vault. To see an example, this link will take you to GLD’s inventory verification report: GLD Inventory
Second item to look for is an auditors’ opinion letter. We have included at the end of this discussion one from GLD as a sample. One of the purposes of the audit is to review the financial controls of the firm. After the audit, the auditors express an opinion on those financial controls.
In the auditors’ letter you are looking for non positive comments from the auditors. Rarely, if ever, do they say anything bad, but may hint at issues. We are looking for an “unqualified opinion”. A “qualified opinion” is reason to immediately head for the exit. For investment vehicles such as ETFs, these letters can be found in the annual filing with regulatory agencies normally linked on the fund’s website.
The auditors’ opinion letter is actually the more important of the two. Whenever we read the annual report on a company, we start with this letter first thing, before reading the CEO’s letter. If it says anything negative, in the trash it goes. Saves a lot of time reading worthless reports.
Having these reports does not guarantee the safety of your metals, but they are better than listening simply to those bold claims made at a seminar. If your Gold depository does not provide both of these documents, then some serious questions need to be asked. Independent third part verification of both the financial controls of the firm, the auditor’s letter, and the inventory verification are two tools to use when selecting your Gold depository.
GOLD THOUGHTS comes from Ned W. Schmidt,CFA as part of a mission to save investors from the regular financial crises created by Keynesianism, and the high priests of that misguided ideology. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts. To receive these reports, go to: valueviewgoldreport.com
