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wRog
How to buy gold in a brokerage account 
21st-Feb-2004 06:45 am
money

Short answer: You can't. Yet.

Things you currently can do in a brokerage account

  • Buy mining stocks.
    The first problem with mining stocks is that you're buying a company not gold, and companies have all sorts of random baggage that come with them --- the main thing to watch out for on a number of them (e.g., Barrick (ABX) and Placer Dome (PDG) is they took on large hedge (forward-sale) positions in the 90s when the gold price was in the toilet, and these are coming back to bite them in the ass. So you need to avoid those folks.
    Newmont (NEM) is the largest and they're mostly unhedged, so they tend to be the recommended choice. The other thing about mining companies is that in some sense what you're really buying is gold that's still in the ground, or in the case of juniors and explorers, gold that we think might be in the ground.... which all introduces potentially huge leverage factors. Say you have a company with huge reserves but that are expensive ($350/oz) to get out of the ground (e.g., Durban Roodeport Deep (DROOY)). If the gold price goes from $400 to $500, said company triples in value. This can be good or bad, depending on how much you like volatility.

  • Buy closed end funds. There are closed end funds that do all manner of exotic shit, whether we want to talk about stock-shorting funds (Rydex Ursa, or Prudent Bear's BEARX), international bond funds, funds that play spreads in the muni bond market, and so on. The main downsides of closed end funds is that you're at the mercy of whatever the managers decide to do and there's this annoying layer of indirection between the market value of the fund and the underlying net-asset-value (NAV) of the various positions it has taken, assuming the latter is even known (yes, it gets published periodically, but...)

    One such is Central Fund of Canada (CEF), a closed-end fund that is essentially a room full of gold and silver (and hence whose NAV is known almost exactly at all times). It's the only one I know about of this sort and it's been sufficiently popular to cause its market price to be out of whack on occasion --- something to watch out for. It also has the problem of not being a US-based fund that satisfies all of the various payout rules for US mutual funds, thus invoking the IRS Passive Foreign Investment Company (PFIC)rules --- which might not actually be too arduous in this case, but are still something of a pain in the butt, paperworkwise.

    And then there are the closed-end funds that deal in mining stocks. Joy.
    For extra joy you can pick one like ASA Ltd. (ASA) just in case you were wondering how it is that I know about the PFIC rules and why I'm no longer subscribed to that particular investment newsletter. Admittedly ASA has been rather profitable, but damn...

  • Gold and silver pool accounts. A Big Room of gold & silver, rather like CEF but now an explicit, though unsegregated, amount is designated as yours. The advantage over keeping it in your basement is they take care of insurance and feed the guard dogs. The disadvantage is they charge storage fees and you have to hope they remain solvent, like any bank (even though the regulatory regime for these folks seems to be rather sparse).

    I mention this in a brokerage discussion, because it turns out that Salomon Smith-Barney offers its own pool accounts (which, I guess, is one way around the solvency/trust problem --- if they go under, we're just fucked in so many ways anyway that it's just not worth worrying about...).

    I don't know whether these are generally available or whether it's only for assholes like me with the full-service rim-job-whenever-I-need-one accounts.

  • Supposedly, REAL SOON NOW, there will be a gold exchange traded fund (ETF) listing on the NYSE, which will be to gold as QQQ is to the NASDAQ index or the SPY is to the S&P500 index. It was supposed to have started up last October but the SEC has been holding it up and nobody knows why.

    Conspiracy theories abound.
The short story here is I decided six months ago not to wait for the ETF --- and in any case I wanted to do silver even more than gold and so far as I know, nobody is planning a silver ETF --- the other options were just too annoying and I should just bite the bullet and open a futures trading account.

Futures just win in so many ways
  1. You get to use leverage
  2. Your money can hold down a gold position and earn interest at the same time, and
  3. the tax treatment is a huge win over the 28% collectibles rate that you have to pay for gains on bullion (and likewise for closed-end funds dealing in bullion)
The downside is that the market is a complete fucking shark tank. The year is 2004 and they still use open outcry pits like in Trading Places --- in other words, forget about getting current bid/ask prices when you want to do a trade; it's place a limit order, cross your fingers, and hope for the best. Which suggests this to be in the "Kids, don't try this at home!" category. On the other hand, I figured there's no law that says I have to use all of the rope/leverage they give me, and as long as I keep that under control everything should be fine. And really, all I'm doing is taking a set of contracts that's vaguely commensurate with an amount of money that I actually have and just keep rolling them forward periodically. So far this seems to be working out.
Comments 
21st-Feb-2004 11:45 am (UTC) - Gold Bug Variations
You should talk like this to me the next time we six go to dinner. emmacrew doesn't talk about investments without mentioning your name. I'm very interested in increasing my investment knowledge, but I've exhausted the mainstream books and my friends who were all "go-go" in the late 1990s are all "no-no" now.

I venture that perhaps there are timider investors in your closed audience who may want to investigate gold mutual funds, like the Vanguard Precious Metals or Tocqueville Gold.


21st-Feb-2004 09:09 pm (UTC)
I'd like to get together with you sometime and just listen to you talk investments. Because, well, you make having money sound really interesting.
22nd-Feb-2004 08:15 am (UTC)
Yes, wrog does make having money sound really interesting. For me, reading his posts on this and the Alternate Minimum Tax problem is like playing with a little kitten, then watching wrog tame lions.
23rd-Feb-2004 01:18 pm (UTC) - Re:
I'll note there are also times I feel like I'm in "A Little Knowledge is a Dangerous Thing" Mode.

I rather dread the day when things finally get complicated enough (ha ha) that I feel the need to hire an accountant, and I get to find out about all of the random shit I've been doing wrong.
23rd-Feb-2004 02:24 pm (UTC) - Re:
Oh uh, now's a good time then for me to ask you:

You've had your house refinanced recently: did you make any one-time deduction of any portion of the costs of the refinance in your 1040? If yes, what?
23rd-Feb-2004 03:32 pm (UTC)
First of all, IANATL but you knew that already.

Second of all, most costs/fees/commissions associated with purchase/sale or capital improvements get added to the basis; they are not deductions. You do need to keep track of them, but they don't affect anything until you actually sell the place at which point it generates a line on Schedule D. And by "sell" I mean to someone else, so refinance, while it may produce additional costs you can use to jack up the basis, does not result in a Schedule D event.

The only actual deductions (Schedule A) you ever get are interest and property taxes. In most cases you just copy the numbers straight from the 1098 forms.

One wonky thing is if you pay "points" (loan origination fee), that's considered to be prepaid interest (and hence deductible), however everything beyond what's considered to be a typical loan-origination fee for whatever market you happen to be in must be amortized over the life of the loan (the general idea is if you paid some large amount extra to get the rate down, then that extra part has to be amortized, e.g., you deduct 1/30 of it every year on a 30-year mortgage rather than all at once like you can do with the "typical" points). Points on a refinance work the same way; the only thing I'm not entirely sure about is what happens if you were amortizing them on the old loan (I think you get the rest of that deduction in one swell foop now that the life of that loan has suddenly been reduced, but I'd have to look this up...). I think "typical" around here is 1-2%.
21st-Feb-2004 10:26 pm (UTC) - Re: Gold Bug Variations
Wow, the title of your comment rang a bell of recognition in me... I haven't read Gold Bug Variations (though it looks interesting), and I'm not too familiar with Bach's Goldberg Variations, but I definitely read Poe's "The Gold-Bug" as a child, though I didn't know it was Poe until just now. I have no idea where I read it, but I distinctly remember all the cryptography (although I see now it's just a simple cryptogram) and the visual of a solid gold scarab.

Anyway, thanks for the (probably inadvertant) trip down memory lane!
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