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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Finally, Precious Metals ETFs I Can Safely Recommend

Commodities / Gold and Silver 2010 May 27, 2010 - 08:54 AM GMT

By: DailyWealth

Commodities

Best Financial Markets Analysis ArticleChris Weber writes: In all the years I've recommended owning precious metals, I've preferred people buy and store actual gold, silver, or platinum.

But this is not always possible or convenient for at least some portion of people's money. That's why since the first gold exchange traded fund came out a few years ago, I spotlighted it.


In the years since then, both good and bad things have happened. Take the bad first: There have been repeated rumors and warnings that the storage facilities for the ETFs do not contain all the metals that are supposed to be there. Second, these ETFs have been attacked by metals bulls for being able to use their metals to short them, or loan them out.

The first ETF and the most popular is GLD. Aside from all the questions raised above, this is clearly more of a "tracker" ETF than a place where you can decide easily to buy and then claim physical gold. In fact, you can take physical delivery of the gold in GLD, but only if you hold at least 100,000 shares of it. Since each share of GLD is equal to one-tenth of an ounce, this means you have to have the equivalent of at least 10,000 ounces.

At current prices of about $1,200 per ounce, this would mean you'd have to have $12 million worth of gold to take delivery of any actual gold with GLD. I say if you've got that kind of money to put into gold, there are far better and safer ways to go.

Up to now, even the best ETFs I've been able to find have not been perfect. Two newer funds, SGOL and SIVR, are probably all right for gold and silver. But people have pointed out that they never say exactly where the metals are stored, just "London Bullion Market Association-approved storage vaults." But I've heard bad rumors about banks in this LBMA system. I have no way of knowing how serious these rumors are, but I've been looking around for alternatives.

Another potential problem with these two ETFs is that they carry no government guarantee in case they indeed turn out to be frauds.

There are the Canadian closed-end funds Central Fund of Canada, CEF for a mix of gold and silver and GTU for just gold. These are honest, easy to buy, and come in share prices that are small enough for the average investor. The problem is that you often pay a premium for all this. Buyers just have to hope that the premium they pay holds up when they want to sell. But there is no guarantee of that.

Enter ZKB...

Switzerland is divided into cantons, similar to the 50 U.S. states. In fact, the far smaller nation has about half the number of cantons. Nearly all of these cantons, or state governments, have long had a cantonal bank.

The largest of these is the one for the canton of Zurich. It is called the Zürcher Kantonalbank or ZKB. This bank, which few outside Switzerland have ever heard of (they don't encourage foreign clients), is now the third largest bank in Switzerland, behind UBS and Credit Suisse. But very much unlike those other two, ZKB is charged by law to operate in a very safe manner, and not make the kind of crazy investments in, for example, the credit default swaps that have brought down many big banks.

In fact, ZKB is wholly owned by the cantonal government of Zurich. (Zurich is both a city and a canton.) This is a bank with a legal public service mandate to fulfill. However, don't let the "public utility" aspect of this bank fool you. Even though it employs nearly 5,000 people, it made a net income of CHF 750 million last year (US$ 700 million).

The average Zuricher has an account there, and with over 100 outlets in the small canton, no one is very far from the bank. Needless to say, this is one of the few triple-A-rated banks in the world given a top rating by S&P, Fitch, and Moody's. One big reason for this safety rating is that, unlike many other banks, under the law the canton bears responsibility for all the bank's liabilities should ZKB's resources ever prove inadequate.

You may see what I'm getting at here. ZKB offers ETFs in gold, silver, platinum, or palladium that trade on the Swiss stock exchange. You don't have to be a client of the bank to buy and sell them. They are publicly traded ETFs.

Even better, they must be matched by actual physical storage. So many bars of actual precious metals have been pouring into ZKB's vaults that they have had to drastically expand their storage facilities.

Perhaps best of all, the ETFs do not carry any premium or discount to the metals prices. They are worth what their weight of metals is.

The only downside for all these ETFs is the price. They are not priced in one ounce shares, like for SIVR in silver, or in one-tenth ounces as for SGOL for gold. Each share of the ZKB gold ETF will cost you one ounce of gold (about $1,200) and the silver ETF share is priced at about US$ 1,750 right now (each share equals over 96 ounces of silver).

So you might only have enough to buy a few shares. And then you have to find a broker who is good enough to buy them. In theory, any broker can buy these ETFs (my readers have told me that Scottrade is able to buy them, and Schwab cannot). But there are good brokers and bad brokers, just like there are in every profession.

There are many more details to this situation (like pricing specifics, currency issues, and trustworthy specialty brokers who can buy shares for you), but they are outside the scope of this essay. Just know that these new funds strike me as excellent vehicles for the global investor. Never again do I have to worry about recommending any ETFs in gold, silver, or platinum.

Good investing,

Chris Weber
Editor's note: For Chris' complete writeup of this extraordinary situation, we encourage you to read the May 3 issue of The Weber Global Opportunities Report. Inside this issue, you'll find everything you need to get started on this idea. But hurry, this is one of the best opportunities we've ever seen for folks looking to diversify their global wealth. You can learn more about the Weber Global Opportunities Report here.

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The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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