What Gold Type Are You?

I don’t know you.

I don’t know me, even though I’m constantly trying to.

But I know me better than you.

And I know what gold type I am. Do you?

"There’s always a financial crisis brewing somewhere."

It’s also five o’clock somewhere.

Whatever. Tell me what time the financial crisis is going to start. And I’ll show up to witness it.

But in the meantime, I’m going to trade according to what the charts tell me — how human nature manifests in price action.

That’s just who I am.

Maybe it’s intuition. Maybe it’s intuitive. Maybe both. Or neither.

But I know my preferred investing approaches tend to work most of the time. For me, that means keeping a couple fingers on the pulse of the market, and being nimble enough to get in and out quickly and easily.

That’s what gold type I am.

I like the convenience of ETFs. I like being able to target gold-mining shares with options contracts. The yoke of digital gold is easy, and the burden of brokerage transactions is light.

Sure, I have a tiny stash of physical metal that I’ve acquired mostly through a sort of inheritance. And I sure like the idea of having some gold and silver coin on hand to toss around if the financial system really hits the fan.

But for me — for my type — my time is spent on digital gold.

An article I read recently, however, warns against hidden risks of investing in gold you don’t have under you bed or in a vault somewhere with your name on it: that is ETFs, mining company shares, etc.

Really?

Right upfront, the article claims that "These risks are more profound than ever, as the threat of another financial crisis is always around the corner."

Maybe the author meant the risks are as profound as "always." The threat of a crisis is always around the corner, and therefore must have been around the corner for some undefined amount of time in the past. But I digress …

What is the difference — rather, what are the actual differences between physical and digital — of which we should be most cognizant from a risk perspective?

The SPDR Gold Shares ETF (GLD) is used as an example.

It is true. You have to own a whole bunch of GLD shares in order to have a claim on actual gold. So, it’ll cost you bookoo bucks to establish such a sufficiently large position. And even still, GLD can issue delivery in cash (rather than physical gold) at its discretion.

GLD tracks the price of a tenth of an ounce of gold. It’s one of the largest gold holders in the world.

Further, the article from GoldCore mentioned "counterparty" risk. This increases commensurately with financial instability.

Think about it: If you own GLD, you must rely on a counterparty to make good on your investment. If the fund’s management, structure, chain of custody, operational integrity, regulatory oversight, or delivery protocols break down, your investment is at risk.

There certainly are a lot of moving pieces. A lot of dependence on a bunch of other things "going right" for you to get what you’re owed in full … and when you want it.

But really? What’s the big deal?

That’s what the stock market, and every other asset market, has become. Pretty much a hugely complex, tightly coupled system that’s dependent on financial-market stability. Its complexity and interconnectedness was the reason for the breadth of the financial crisis in 2008.

It’s pretty much a game to which we’ve given our tacit approval just by playing in it.

Gold ETFs are no different than other ETFs in that regard. And really, minus some mechanics, ETFs are no different than stocks and other securities. For most, their value is predicated upon policymakers giving the banking system its undivided attention.

So, really, if we can agree that there is perpetual risk in the market, then what are the other risks of digital and paper gold?

Making Bad Decisions

Frankly, in the "new normal" market environment, the only risk of holding digital gold is guessing wrong.

"There’s always a financial crisis brewing somewhere." — It’s also five o’clock somewhere.

I’ve made money for readers by recommending shares of gold mining companies and ETFs as well as options on them. I’ve lost money in those recommendations as well.

But really, it doesn’t matter whether I or a hundred other analysts, commentator, economists, magicians or whatever expect a major market collapse. The only thing that matters is whether I guessed right or wrong about the direction for gold.

As the good book says:

Always remember to be dexterous and deft,

And never mix up your right foot with your left.

But if Theodor Seuss Geisel’s wisdom doesn’t make you the digital gold type, I understand.

For, as the guys at GoldCore intended, "If you’re buying gold as a hedge against a failure in the financial system … " then you’re going to want to own physical gold.

End of story.

What type are you?

Do right,
JR Crooks

“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…