Thursday, 20 October 2011

20 October 2011 gold ETF report: test of faith

Today my ETF Securities Physical Gold (PHAU) shares dropped 2.4%.

I'm not going to interpret the causes - some of them are discussed here (IB Times) and some more here (MarketWatch). The argument is that if gold isn't a fear barometer it's a useless investment for a while.

Where do I stand in this situation?

First the boring bit - deciphering what's happened to my PHAU shares. Then I'll assess whether I'm in enough pain to act and, lastly, whether I have enough knowledge to act sensibly.

When I bought the shares on 22 September I paid $172.734 per share (that's before adding the £11.95 I was charged to carry out the transaction.)

At the close of business today Hargreaves Lansdown would have paid me $158.03 for each of them. (The offer price was $158.22 per share.)

So my shares have dropped 8.5% in their dollar value - again that's before adding the cost of dealing.

Unfortunately that's the happiest spin my gold ETF story gets today.

When I bought the shares they cost £111.9787 each. There were 8 of them which adds up to £895.8296.

By the end of today - 20 October 2011 - my eight shares had a sterling value of £803.81 according to HL which used an exchange rate of $1.5728 to £1 to get this figure.

So in sterling, before dealing costs, my loss is £895.8296 - £803.81 and on that count I'm down £92 which equates to a 10.27% loss. That's a lot worse than the 8.5% dollar loss calculated above.

That appears to be because the pound has strengthened against the dollar (check this Google chart). It now costs me more to buy pounds with my gold ETF dollars than it did back on September 22.

At the end of 22 September £1 would have bought me $1.5358. Now, nearly a month later, my pound buys me $1.5728. That works out at a 2.4% increase in the purchasing power of my pound against the dollar. That has worked against me because my investment is in a dollar denominated asset.

If I wanted to sell now I'd have to include a £11.95 transaction cost which would come off what HL would pay me: so £803.81 - £11.95= £791.86.

When I first bought the shares I also paid £11.95, a total of £907.8 for my shares and so the difference between the entrance and exit price widens again. Now I would be exit with £791.86 when I spent £907.78 entering. A £115.92 loss or -12.7%.

So what do I do?

It feels like I picked a testing time to try out a 'leap-before-you-look" investment style in gold. But where does my faith lie? Should I sell and wait til things get better? Or should I hang on?

I'm a financial journalist of sorts (out of work at the moment!) and I've written about gold related investments for a while. This generally involved passing on various people's views about the price of gold and silver.

It's embarrassing but while writing about it, it didn't cross my mind to ask such a basic question as: "Where does the price of gold come from?"

But when I bought physical gold ETF shares it was an obvious hole in my knowledge because my investment tracks the "spot price" of gold.

Adrian Ash, head of research at the BullionVault helped me work towards an answer in this piece: Is the gold "spot price" real?

Then today I read some of this blog "Gold Chat" and was relieved to find out that it's quite common for people to take the construction of the gold price for granted. They don't realise that it's an issue until they buy the stuff.

Bron, who works at Perth Mint in Australia and writes Gold Chat said: "It was always amusing to me when clients would ring up to buy and we would quote a price and then, naturally, they would say “Well, where can I get what the spot price is?” so they could work out if our price was “fair”. The answer was, “It doesn’t exist.""

I expect there will be lots more surprisingly basic (or stupid) questions I need to answer before I get comfortable with the product I own, let alone the gyrations of the gold market.

On that front Bron is a reassuring read for people left confused and worried by the daily shifts in the gold price - look at the day trading section of the Investment Time Frames section. I feel like this has provided me a bit of space to work out what my motivations were for buying gold in the first place. I'll be looking at Gold Chat's investment time frames: part one and part two to start off with.

I don't know what I'm doing but, at the moment, owning gold has forced me to pay attention. I don't think I'd be interested if I wasn't invested enough for this to be a painful experience.

I'm not interested in diversifying until I have a better grasp of what I've already got - although I do own BlackRock Gold and General Fund too.

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