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Weekend Edition

The Best of The S&A Digest
Saturday, February 21, 2009

From a reader: Can you tell me which gold ETFs actually hold physical gold to back up your investment?
 
As far as I know, the SPDR Gold Shares ETF (GLD) simply buys gold on the London bullion market, which it stores in its London vaults. It sells shares and buys gold, and occasionally sells gold to redeem shares (in 100,000-share blocks called "baskets"). It also sells small amounts of gold to cover expenses. That's all it does to my knowledge.
 
The Ultra Gold (UGL) and UltraShort Gold (GLL) funds do not invest or sell short bullion directly. From their prospectus, these funds "will not directly or physically hold the underlying gold, but instead, will seek exposure to gold through the use of Financial Instruments..."
 
But I don't like ETFs because they're a trader's tool, turning physical gold into paper gold. If I'm going to buy the ETF, why not just buy the physical gold instead? I have explicitly told my readers to avoid the gold ETF, and I continue to do so. I consider gold a form of savings. I buy it. I don't sell it.
 
If I want liquid leverage to the gold price, I'd rather buy stocks like the ones I'm recommending in the current issue of Extreme Value. Click here to get access to the new issue and the conference call we hosted yesterday.
 
Our own super-trader, Jeff Clark, says a pullback in gold is likely. Gold has become awfully popular and, as you know, when any asset becomes very popular, that's usually a sign of a top. On the other hand, sometimes market fundamentals overpower market sentiment. I wouldn't be surprised if this is one of those times.
 
As for me, I'd never trade gold. Not that you can't or shouldn't trade gold. But for me, gold is simply the ultimate store of value. I buy as much as I can afford each year. I put it somewhere very safe. I forget about it.
 
Some years, I might pay too much. Some years, I've definitely gotten a great value. But it hardly matters, because I'm committed to a lifetime pattern of purchasing and I will never sell. My bet is my gold investing alone will make me a wealthy man over the course of my life.
 
The world's paper currencies are constantly devalued by the politicians who run them – it has always been this way, it will always be this way. It is part of human nature. Never forget this: The central truth of economics is scarcity. There will never be enough of anything to satisfy everyone. But successful politicians must promise everything to everyone. Paper money is the bridge between economics and politics. It's a bridge that cannot stand for long.
 
The other day, I asked Chris Weber how he felt about the euro disbanding. The debt market is definitely forecasting some trouble... Spreads on the 10-year government debt of Ireland, Greece, Portugal, Italy, and Spain over that of Germany (the benchmark European economy) are widening. Ratings agencies are keeping a close eye on the above five countries: Standard & Poor's has downgraded three of them and put another on credit watch.
 
Chris agreed that the demise of the euro is very possible and he's started hedging his bets. From Chris:
 
I've recommended that those people holding euros buy the Kingdom of Netherlands note that matures a year from now. Already you can see differences in the yields of the various euro countries. Holland has traditionally managed its finances very well and conservatively in the centuries past, and this tradition continues. So if the worst happens, and the euro breaks apart, the old national currencies will come back, and the Dutch guilder is what you'll end up with. And I'd rather have that currency than the Italian lira or Greek drachma.
Chris is a spectacular investor. In fact, he's never had a job... other than managing his own portfolio. He called the top in stocks and put his readers into gold and silver at exactly the right time. He writes a bimonthly newsletter that highlights his thoughts on the economy and what he's doing with his personal portfolio. If you're not a subscriber already, it's definitely worth checking out. You can learn more here...
 
If you're not familiar with the tale of diamond giant De Beers, how the engagement-ring industry was born, and the greatest cartel of the 20th century, be sure to check out one of our most popular posts on The Daily Crux: Diamonds are one of the great scams in modern history. It's an amazing story... and one of best articles you'll read all week.
 
Regards,
 
S&A Research




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