Tuesday, 1 November 2011

So, how much was that gold ETF again?

I still don't really know why I own gold or whether I trust it. But that hasn't stopped me thinking about buying more ETF Securities Physical Gold (PHAU).

After the Greek prime minister surprised everyone by calling for a referendum everything fell, including gold. The price of PHAU dropped by more than 2% during the day but ended the day down less than 1%.

As PHAU is a dollar denominated share I needed to find out how much of it I could buy with the pounds sterling that I own. When I looked at the exchange rate between the pound and the dollar I saw that the pound had dropped 1.3% against the dollar - this meant my pounds wouldn't go so far as they had done 24 hours earlier. But at the same time it meant my existing investment in gold hadn't lost as much of its value in terms of pounds sterling as it had in dollars.

Even so, I was still thinking about buying more shares in my gold ETF because the last time I bought I paid $172.7 per share. On that day - September 22 - the pound fell dramatically against the dollar and was only worth around $1.53 at end of the day. I got a slightly better rate and the combined moving parts - the gold price and the exchange rate - meant that I paid £111.97 for each of my PHAU shares.

Today the same shares were trading around $165.7 each and, because the purchasing power of my pounds had increased since my last adventure - (they now buy $1.59 each: Google Chart ) - I could have bought them for around £104.21 per share.

That's a fall of nearly 7% since my last buying point.

Information gap

Unfortunately I only worked out a general view - that I wanted to buy - and I had done it using Google Finance data before opening up my Hargreaves Lansdown (HL) account. When I started the process to buy the first HL page showed me everything in dollars:

(The prices shown, if you can read them, are from later in the day.)

I placed a deal via the "place deal" tab where I said I wanted to spend £1100 including costs. The last stage of the buying process was a 15 second window in which I had to decide whether I wanted to accept a specific deal. But this page only gave me a total cost in pounds which meant I didn't know how much I was paying per unit.

Luckily I was offered 10 units so I could work that out easily enough - but was it a good deal? Was it even what I expected it to be?

At 13.48 I pondered over this screen for 15 seconds:
It took a moment but I realised that I didn't have enough information here to know what the exchange rate was or how much I was actually paying for the gold in dollars. If I had a dollar price and a pound price I could have worked out the exchange rate if I wanted to.

At 14.01 I saw this screen:
At 14.13 I saw this screen for 15 seconds:

At 14.42 I saw this screen for 15 seconds:

So what's the problem? I can't tell if I'm making an unnecessary fuss about this. It could be argued that if I'm buying in pounds sterling so why do I need to know anything more than the price I'm paying in sterling?

To me the problem is clear. Only having a sterling value obscures the two important factors at work in the investment: the dollar value of gold and the value of my pounds against the dollar.

When I buy I want to know if the price is attractive because of a change in the currency relationship or because the thing that I wanted to invest in - gold - has performed well. The situation in one of these moving parts may be dominant and it may be changing for better or worse.

I don't think it's unreasonable for me to know these simple facts when making the investment.
What happened to the sterling price of PHAU today is a case in point. The price of gold fell but my existing investment didn't suffer too much because the dollar strengthened against the pound.

However, looking at the exchange rate I could see that, despite the pound falling more than 1% against the dollar, my pound was still a lot stronger than it had been the last time I bought Google Chart .

For now though, I have to accept that this information isn't available at the moment I buy.
What's more, as I discovered the first time I bought PHAU, it's not easy to get hold of that data even after the event.

This means that an investor needs to know beforehand what sterling price they will accept. They also have to accept that they will not know why a price may be better or worse than they expected. And if they want to find out they will have to go back to data that is 15 minutes out of date. This knowledge gap makes it difficult to decide whether they should wait or go ahead and buy at that moment.

Even if I decide to delay my buying decision for a few minutes and the price changes I won't know if it's because the currency has strengthened or if the gold price has changed.

These factors can change in seconds, particularly in times of market stress like today.

There is also a disconnect between the presentation of the data that alerted me to a potential good deal and the presentation of the price I was then offered by HL.

In my case I was attracted by a dollar price of individual PHAU shares on Google Finance (with a 15 minute delay) - this was roughly confirmed by Hargreaves Lansdown with another delayed dollar price per share. Then, at the final stage, in the 15 second window I had to make up my mind, I was confronted by a sterling price that gave me a total for all the units I was buying - not a figure per share.

Not only was this switch a little bit disorientating, it took me moment to realise that it was impossible for me to connect the pound sterling price I was being offered to a dollar price that had looked attractive.

PS. Interesting observations about the world of credit default swaps (CDS: insurance policy against goverments defaulting on bonds) from Jim Sinclair. He points out that a referendum in Greece could change the status of Greek debt to "default" and trigger those insurance policies.

If that happened attention could swing away from european banks to US banks who are the main sellers of CDS.

Also an interesting article from Galmarley.com: "The market doesn't wait conveniently showing the point at which we should get out. It hangs between greed and fear. When it falls it tempts us to hold on with the prospect of recoveries which don't happen, yet it punishes us repeatedly if we start selling, with bounces which would have saved us from our loss. Bit by bit it turns the shrewdest market operator into a rabbit."

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