How much gold do I actually own?

I own 18 ETF Securities Physical Gold ETF shares with the (PHAU) ticker on the London Stock Exchange. Each of these shares entitles me to 0.0982449 of an ounce of gold (according to this page on ETF Securities web site:http://www.etfsecurities.com/msl/index.asp).

Why have I got this much gold per share? According to the PHAU prospectus it's because everyday that the share exists a small chunk of it is paid back to ETF Securities. Over a year these small chunks will equal the 0.39% annual management fee.

The amount of gold per share diminishes every day from the date of the launch which means the older the ETF the less gold each of its shares will be entitled to. When PHAU shares were launched in 2007 they were entitled to 0.1 of an ounce of gold and that has been diminishing ever since. Hence the 0.0982449 of an ounce of gold per share today.

The chart below shows the rate of decay for three physical gold ETFs from November 2009. I picked this date because it was the launch of the ETFS Physical Swiss Gold (SGBS). At launch SGBS shares were entitled to 0.1 fine troy ounce of gold each.

The US dollar version (PHAU) which I own was launched in April 2007 so is entitled to less gold than the Swiss ETF.

Meanwhile Gold Bullion Securities (GBS) is even older having started in 2003. It also pays a higher management fee of 0.4%. However it allows investors to convert their shares into physical gold (which means different rules apply to it - it can't be held in an ISA and the annual management fee is slightly higher (question number 28)).

Even though I am never likely to touch the gold I own, it determines the value of the shares. So the value of PHAU shares diminish inline with the amount of physical gold backing it.

In a 2009 article by Index Universe Ronan O'Shea of market-making firm Nyenburgh, said: "Most of the time the different physical gold trackers have traded in line with the asset value implied by their gold content, with occasional premiums to NAV, which have occurred more often for those funds with a less-diversified creation and redemption mechanism (where ETFs have fewer official market makers - known as 'authorised participants' - who have to offer a price at which they will buy ETF shares from investors and price at which they will sell to them).

What is that gold worth today?

So, if I own 1.7684082 ounces of gold, what do I actually get when I sell it?

At 4.30pm today, when the London Stock Exchange shut up shop, my broker, Hargreaves Lansdown was offering to buy my shares for $176.40 each. If each share is entitled to 0.0982449 of an ounce of gold then they would be paying me $1,795.5 per ounce (176.4/0.0982449).

That's before working out what the pound dollar conversion rate would be or taking into account the £11.95 cost of selling.

But first I want to check that I am actually getting a reasonable deal on the gold spot price. According to BullionVault's spot price chart the selling price of gold was pretty close to $1,795 at 4.30pm.

It looks like I've done better than I should have done!

But what have I got in pounds? If I take my 1.7684082 ounces of gold and multiply it by the value of $1,795.5 per ounce it comes out at $3,175.20 for the whole lot. When I wrote this story the pound was buying $1.60 (Google Chart) and so my investment would be worth £1,984 in total.

Does this correspond with the pound denominated version of this ETF? The value of the PHGP exchange traded fund was £109.65 to sell. I have 18 shares, this would have come to £1,973, so I'm out by a bit - it could be the exchange rate (I don't know which one they're using, or just straight maths failure).

I can also check the value of my holding in the Hargreaves Lansdown account which is based on the bid price and on a $1.6072 exchange rate. That comes out a lot closer to the PHGP value (not surprisingly!) at £1,975.61

If I took my gold to a pawnshop in Hackney, what would I get?

All together, in ounces my shares hold 1.7684082 oz(troy) which converts into 55.0036 g.

If I wanted to sell my gold in a Hackney pawnshop I'd got to one called Cashier (last month they offered me the best deal) and today their selling price was £25 per gram which would have got me just £1,375 for all my gold. Bear in mind that they only offer it on 22 carat gold and the gold I own is 24 carat.

Gold prices "unreasonable" should be $1,200 says China's biggest producer

On Sunday it was reported that Lan Fusheng, vice chairman of Zijin Mining, said “The gold prices currently are unreasonable.”

Zijin is China’s largest gold producer by output and China is the world's biggest gold producer with a fast growing output (Mineweb).

He said: “Prices have been boosted not only by people’s needs to hedge risks, but also by speculations” adding that a price between $1,200 - $1,300 was more sustainable over the next few years.

Lan Fusheng said that if the economic situation deteriorated he expected investors to seek refuge in the US dollar which would push down the price of gold.

He pointed out that high gold prices weren’t always good news for Chinese gold firms: “Rising gold price is good to company’s profit, but it makes overseas investment more risky and much more expensive.” If gold prices are high then so are the prices of gold miners.

Since 2009 Chinese retail investors have been encouraged to invest in gold. Only two days ago a piece in China Daily (US based) reported on the gold buying frenzy in China which is catching India as the largest gold market.

The piece quoted the World Gold Council's Marcus Grubb saying: “Gold demand is expected to remain firm through this year and next. Chinese consumers will continue to drive up gold demand as economic growth in the nation is still strong."

The piece said: “Earlier WGC predictions saw gold demand in China doubling by 2020, but there are now expectations of that happening sooner.” It added that the WGC “dentifies four key factors driving Chinese gold demand in a period of "ongoing global economic and financial uncertainty". These include gold investment being rooted in Chinese culture, impending inflationary fears in emerging markets, the country's central bank being positive on gold and limited domestic investment channels.

In August it was reported that despite increasing the amount of gold mined, this was outstripped by the level of domestic demand for gold.

Last month Adrian Ash, head of research at BullionVault pointed out to Gold ETF Investor that China had a high number of London Bullion Market Association registered gold refiners with applications for more in the pipeline.

ETF relevance? I don't know but if it's a genuinely held view or a state-sponsored aim its an alarming prospect for gold owners like me who bought far above the allegedly sustainable price!

Confusion over futures markets for Monday: good or bad for gold?

The CME - Chicago Mercantile Exchange - runs the US commodities futures markets including gold and silver. It said on friday that it was changing the margin requirements - this means that traders have to put up more of their own cash to participate in the market.

In the past increased margin requirements have been associated with large drops in the price of precious metals and therefore any gold ETFs.

In some quarters CME margin calls are seen as part of a concerted effort to undermine precious metals (see Bart Chilton below!) when investors are looking for safe havens for their cash.

Some of the potential impact of the CME's changes were discussed on Eric De Groot's blog here.

It quotes another story saying the changes imply "that options and futures holders will be forced to deposit addition capital to the CME in the form of maintenance margin, simply to hold their positions. This will put markets under pressure on Monday."

But a further announcement and correction from CME attempted to neutralise this fear: "We apologize for any confusion our initial advisory may have created." Instead it said that it had made it cheaper for people to buy and sell futures to make life easy for MF Global clients transferring their holdings after the firm went bust.

But Tyler Durden at Zero Hedge says the move - making it cheaper for people to buy commodities futures contracts - could make matters worse: "Because while the lower Initial margin may apply to MF accounts, it will also apply to any Tom, Dick and Harry beginning Monday, who will suddenly see a 30% reduced gating threshold to put on a position. Any position, no matter how risky.

"Naturally, if enough people suddenly jump to put on risk, and the market flips and all new positions end up underwater, who will bail out CME accounts if, like MF, there is just not enough capital on the balance sheet? MF Global?"

I hadn't spotted this from last week either: CFTC Commissioner Bart Chilton on King World News saying that criminal things have been going on in silver market.

Gold ETF holding more than doubled

From 22 September to 4 November I owned 8 shares of ETF Securities Physical Gold (PHAU).

I now own 18 of them. The extra 10 shares have set me back another £1092.

This is not going to look like a fortune to some but I don't have a great deal to play around with.

According to my Hargreaves Lansdown account my total holding in PHAU is now down by 3.26%:

At the end of the today PHAU was down 0.5% and the pound was up 0.65% against the dollar, both more favourable than the price at which I bought at.

I didn't check to see how my original shares were doing before this purchase but when I bought the original 8 shares they were £111.97 each. At the end of today these shares were worth £107.5.

So the 8 shares I bought for £111.97 were down 4% while the 10 I bought for £108.015 were down just under 0.5%.

I'm worried I've bought at a bad time but I felt that if I was buying as a defence against disaster I can't keep waiting for the disaster to pass before investing. Unfortunately gold has generally fallen in the wake of upsets then staged a recovery. While this shows it should make sense to invest after the event, do I know if that pattern is going to persist?

I have until Monday morning to work out what I'll do if the gold price falls sharply on Monday on the back of whatever may develop in Greece. For now though, it appears as if Greece has taken the least tumultuous route.

What people are saying about gold and gold ETFs: 4 November 2011

The deal from Hargreaves Lansdown at 11.09am. I couldn't make up my mind again (details below).

Before that, here's what some other people have been saying:

Up or down

Nicholas Trevethan, a senior metals strategist at ANZ Bank told Reuters: "If Papandreou keeps his mandate, that may well trigger another round of buying, not only in gold but in other commodities as well." (From Reuters: "Gold eases after rally")

Down

In the physical market the piece reports the current price could be too much for jewellers to buy and "speculators could be tempted to cash on gold's recent gains" and higher prices might prompt people to sell their scrap gold. (From Reuters: "Gold eases after rally")

Up for now

"I think gold is really supported by the euro zone (crisis)," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong.

"I think sentiment is more or less still bullish because of the Greek problem and the banking sector is also not good. People are still packing their money into safe-haven assets," said Leung, who pegged resistance at $1,800. (From Reuters: "Gold eases after rally")

Up (in euros)

Bloomberg quotes Dennis Gartman: “The driving force in the gold market is the problems in the euro" adding that “Central banks in Europe and individuals will want to lower their euro holdings and buy gold since no one knows what is happening to the euro. The euro is heading towards parity once again.”
He then said: “Gold is a currency.” (He's wrong, according to Dean below...)

From "Gartman sees gold in euros..."

Up

On 2 November Bloomberg said its "Top gold seers forecast record high in March" The piece cites Ronald Stoeferle at Erste Group Bank AG in Vienna, apparently he is Bloomberg's "second most- accurate forecaster in the past three months".

He said: "There is a loss of trust in the entire financial system and urgent need for safe-haven investment” adding “the environment for gold is just perfect.”

Up or down

But then, later it has Dean Junkans an analyst at Wells Fargo & Co. (whose accuracy as a forecaster is not mentioned although he did say back in August that gold is a “bubble that is poised to burst” before the price plunged).

He said: “It’s not risk free and is not a currency, even though too many people think of it that way” adding “It can go down to $1,300, and could also rise to $2,000, but there is definitely a downside potential.”

Up euro stlye

Up

Bloomberg's "most accuarte" gold analyst - Jochen Hitzfeld, the analyst at UniCredit SpA in Munich - said: "There’s huge potential for gold in the coming years.” He said: “Investors are buying gold. That’s reinforced by buying from central banks. Prices did run up a little bit too fast, but the drop was just a breather.”

Up

Bloomberg's fifth most accurate analyst Jason Schenker, the president of Prestige Economics LLC in Austin, Texas, said: “When we look at gold five years from now, we will say gold was wildly cheap." He said: “What happens to gold is going to hinge on what happens to the dollar, and that is going to be influenced by what happens in Europe and monetary policy.”

“The driving force in the gold market is the problems in the euro. ” He said: “Central banks in Europe and individuals will want to lower their euro holdings and buy gold since no one knows what is happening to the euro. The euro is heading towards parity once again.”

UP

This morning Citywire's chart of the day notes the rise in Physical Gold ETF holdings and quotes strategists at Commerzbank: 'Gold can be expected to enjoy continued strong demand as a store of value and a safe haven amid the many U-turns we have seen during the Greek crisis.'

Citywire also quoted RBS strategists: ‘Gold is now building a bridgehead and we forecast higher prices in the months ahead with an average of $1,900/oz possible during the key gifting period of the 2012 Chinese Lunar New Year.’

UP

A piece on Seeking Alpha by George Maniere, who's blog can be found at Investing Advice said: "In conclusion, I think that every retail investor needs to have 20% of his portfolio in gold and silver. What they need is exposure to precious metals. The biggest threat to anyone in retirement is inflation. "

He also said: "Look for gold to attack $1775 first, then $1800, $1840, and $1900 in the coming six to ten weeks or so."

So what do I do?

The deal from Hargreaves Lansdown at 11.09am was this:



Two days ago I was looking at this:

This is what PHAU was doing.



The bigger move was the pound, up 0.6% against the dollar (Google chart link) and the dollar value of PHAU is down a bit (Google Chart link) together they point to a 1% better price for a UK gold ETF investor.

But as I've pointed out before, I won't know if that's why I'm getting the price I'm getting from HL.

So I'm still not sure about buying now or waiting til after the Greek votes and non farm payrolls in the US.

The latter could see some changes in the value of the dollar. I'm not sure it'll have much effect on the price of gold - but both of these are guesses. I'll have to have a look.

I want to try and see what my decision making process is and why my brain screams "don't do it" every time I think I might.

Gold ETF Investor market report: 2 November 2011

This isn't really a market report. Here's what some other people are saying. You could spend a lot of time reading it - but would it help?

A general goldy newsy piece from Reuters: Gold rises on deepening eurozone crisis which included this on ETFs:

"In ETF flows on Wednesday, gold holdings were up by just over 11,000 ounces after an inflow into the COMEX Gold Trust.

"Last month, global holdings of gold in ETFs rose by 852,000 ounces to 67.907 million ounces, more than offsetting the 444,000 ounces outflow in September and the 297,000 ounces outflow in August."

MarketWatch: Gold could go up but platinum will go up more

OilnGold: Dont bet on it, gold could go down a bit more

Gold investing news: Lots more people could invest in gold soon - China makes gold owning easy for its citizens (opposite of what happens here).

Harvey Organ: Says that gold and silver prices were pushed down by the big short sellers - but suspects it'll have backfired (I still don't understand how the bear raid stuff works.)

There's loads of stuff in the Harvey Organ post including this from

ZeroHedge: How US banks are lying about their European exposure, an article saying that if anything else goes wrong it will test whether interconnecting deals between banks adds up to a safety net (hedge) or a bad bet (melt down).

ZeroHedge points to "MF Global for example, which filed bankruptcy precisely due to its hedged (?) European exposure - luckily MF was not in the business of writing CDS on European banks or else all hell would be breaking loose right now."

He applauds this Bloomberg piece which said U.S. lenders exposure to Greek debt via CDS (insurance against default) rose by $80.7 billion to $518 billion in the first half of 2011.

Too much too soon

But this is all too much for me. I'm still wondering how, why or when to buy more of a physical gold ETF (PHAU).

Yesterday I nearly bought some more. I didn't do it and tried to blame my broker.

But it was me - and the situation bought up very basic issues that I need to address.

Like how long can I go on deluding myself that I have a strategy?And why have I bought gold when I can't honestly answer these simple questions:

a) Is my aim to build up a stake in gold because I think the world is about to collapse?

b) If so, why don't I just put cash in it now?

c) How much of my cash am I actually talking about?

d) Once I've put it in, do I have any idea why or when I should take it out again?

But then the panic wanes a bit. I remember that I started off knowing that I know nothing and I shouldn't be terrified by other people knowing lots more than me.

I also need to remember that I've bought gold because otherwise I wouldn't bother looking at it.

But what did I learn from yesterday?

1. It's never going to be obvious when to buy and when I have bought it will feel like I made a mistake until its obvious that wasn't a mistake which could be never.

2. I've got to make up my mind if I'm pound cost averaging or not... if I am I should have bought PHAU at around 11am on October 22, a weekend but I would still have got a better price than now whether I'd bought before or after.

However, I don't really want to buy automatically because the reason I'm doing this is to force myself to pay attention.

3. So, if I'm not pound cost averaging, what am I doing? Should I be buying on dips (investing - catching falling knives?) or following trends up (trading - chasing bubbles)? I don't know. I need to do some reading!

4. Volatility - do I really need to think, every time I miss what looks like a low, that it was my last chance ever?

5. I need to stop looking for information to justify what I've done. I need to find out if I am doing the right thing, not prove that I am doing the right thing.

This all sounds like something out of a self help book! Find yourself - buy gold! Or am I already turning into Gollum?

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."

Gold investors: support competitive pawnshops

Sweeping reports on the global gold market can be too slick for investors like me to get their heads around. But I want my gold exchange traded fund investment (PHAU) to have a foundation in something that I can see for myself. This might be an unrealistic aim but I'm trying.

So far...

When I checked my local gold market on the Narroway in Hackney Central the pawnbrokers offered better prices for scrap gold than the jewellers.

That was all I could squeeze out of my first aimless mission. Then a foray south into Tower Hamlets found muslim gold owners breaking their religious code to pawn their gold.

What next?

If my local gold market is dominated by pawnshops are they offering a good deal? A possible lead came from the BBC report on the gold buying season in India by Delhi reporter, Mark Dummett, for BBC Radio 4's The World Tonight.

Dummett talked about the big business of lending against gold in India and one successful example of a company that does it: Muthoot Finance.

Muthoot, which listed on the Bombay Stock Exchange in May, also opened its first store in the UK last year in the heart of London's Indian community in Southall, in west London. In the UK it charges interest rates between 5.99% per month (for loans between £20 and £199) up to 2.5% (for loans above £3000).

Taken at face value these rates look far better than the 8% per month offered by pawnshops in most other UK high streets.

That's what I was offered at a Money Shop in Bethnal Green - (I couldn't find the rate on its website) and it's the going rate at H&T, a publicly listed UK pawnbroker which explained the deal in its full year results published in March 2011.

H&T said that 95% of the collateral for its loans was gold jewellery, precious metals and/or diamonds. It said: "The pawnbroking contract is a six month credit agreement bearing a monthly average interest rate of 8%."

It also said that if a customer "does not redeem the goods by repaying the secured loan before the end of the contract" it will "dispose of the goods either through public auctions... or the Retail or Scrap activities of the Group."

Since last year there seems to have been a monumental rise in the amount of people failing to collect their items. The group reported scrap profits from "items forfeited from the Group's pledge book contributed £9.0 million (to profits) in 2010" compared to £2.1 million in 2009. However I'm not sure if those figures should be taken at face value (there was some kind of technical postscript).

This looks interesting. My guess is that most of this reclaimed gold will not be recycled as jewellery in the current climate because there are too few buyers (that's what Hackney jewellers were saying).

So what happens to this gold? Does it re-enter the financial system where investors like me buy and sell depending on the price but have no real demand or desire for the metal itself?

May be it would be better for gold investors if people who owned it kept hold of it - even if it remains in a pawnshop's safe. That's not likely to happen while loan rates remain so high. The double disadvantage for anyone pawning their jewellery is that they only get scrap value (weight) and if they want to replace it they'll have to pay the premium for craftsmanship as well as the spread on the gold price.

Before getting too excited about the Indian invasion this isn't a massively well researched piece and although I've put in some questions to the companies mentioned, none have got back to me.

Back to the slippery global picture, the current high price of gold is not expected to deter Indian retail buyers (the biggest demand for gold).

But some Indians think gold loan firms like Muthoot are selling their deals too hard and I haven't checked what the rate of 'forfeit' is for Muthoot - although a lower loan rate is likely to help.

ETF relevance?

I need to get a picture of how important the scrap market is to the global price. In its 2010 Gold Survey analysts at GFMS, a precious metals research agency, said there were three sources of supply in the global gold market.

The first was mining which accounted for 2,572 tonnes in 2009 and the second was scrap at 1,674 tonnes (39% of total supply) with central bank third and only accounting for 41 tonnes.

GFMS analysts said that the supply of scrap gold increased significantly in 2009 in North America and Europe. "Much of this growth was a result of heavy promotion by an improving network of scrap collectors, who made great use of consumer's need to sell unwanted jewellery to raise cash in a challenging economic environment." Read H&T's results to see how they cashed in on this with their "gold bars".

The question is how much of the "unwanted jewellery" was really unwanted and whether that supply would have been less if consumers were offered better deals?

Cashing in on gold loans to muslims in East London?

Jewellery shops on Whitechapel Road, Tower Hamlets, East London.

The quest to connect with my gold ETF investment led south from Hackney into Tower Hamlets. Why? Because on Wednesday I heard a report on the BBC about gold in India in which the reporter said gold was in the DNA of indians.

I noticed the journalist had also reported on people panning for gold in the sewers of Dhaka, the capital of Bangladesh.

I wondered if gold was in the DNA of Bangladeshis too and London's highest concentration of Bangladeshis is just a short cycle ride south of Hackney. May be they had a more interesting gold market there.

Inside UKAY Jewellers on Whitechapel Road I was offered £38 for my signet ring (Hackney Jewellers offered between £30 and £40 so nothing special there).

A visit to Bombay Jewellers proved fruitless as they didn't deal in anything less than 22 carat gold.

I asked both if there were any Bangladeshi pawnshops - in Hackney they tended to offer better deals. Both said no adding that Muslims don't pay interest and so they don't run pawnshops or offer loans. I'd forgotten that Muslims don't do interest! It's not halal.

But somebody in Whitechapel must be using pawnshops - a new one was being built two shops up from UKAY (It was Fish Brothers, picture below, which has a branch in Hackney.)

Had I known there was a Money Shop on Whitechapel High Street I'd have asked them. It's right opposite the East London Mosque (For the latest on East End politics you could start here: Trial by Jeory)

Instead I dropped in on the Bethnal Green Road branch where they offered me £45 for the ring (much better than the jewellers). The woman behind the counter was happy to chat and said that she had served a number of Bangladeshi women, usually pawning their wedding jewellery.

I asked if they had been able to reclaim it, she said generally yes, they had. She also said that an interest rate on a loan backed by my signet ring would have cost me just under 8% a month.

The moral of the story?

Hopefully families that are put in a position where they need to pawn jewellery aren't doubly stigmatised by Islamic law. They probably are but I don't imagine it would take much imagination to neutralise the unacceptable interest rate and may be charge a storage cost instead.

It seems that there all sorts of options allowed under islamic law that could easily be applied to pawnshops and give Muslims access without breaking their religious code.

Hopefully a loophole will be found in this lot before the financial crisis drags poorer gold owning muslims into a gold loan dilemma.

That's not to say that taking gold to a pawn shop is good idea. It's not a cheap way to borrow money and that's what I'll look at next.

Anything to do with a gold ETF?

May be not yet.

Gold ETF Investor market report: 24-28 October 2011

As most commentators have pointed out, last week's eurozone rescue package (BBC explanation) coincided with gold prices rising again. The interesting point being that gold moved in the opposite direction to shares: on Friday the FTSE 100 closed down 0.35% while ETFS Physical Gold (PHAU) gained 0.84%. (Google Chart)

The big picture reasons were discussed in a Wall Street Journal piece in which the vice president at RBC Capital Markets said the eurozone plan involved printing lots more money and so it was an "inflationary rally" (if there's more money around then prices will rise).

Similar observations were made by a contributor to Mineweb but with a different spin: "We do not think that is the reason why gold and silver are rising... We need the ship to be made seaworthy. There is no sign of the political or financial will to do that. This continuing lack of confidence and uncertainty is a far greater contributor to the rising gold price than anything else."

My local gold market: Hackney

I bought a small amount of gold a month ago and it has already lost about 10% of its value. The gold I bought wasn't the sort I could hold in my hand, it was shares in something called an exchange traded fund (ETF).

I bought the stuff because gold is meant to be a safe bet in times of financial trouble - like now - but recently it hasn't behaved as expected.

The losses add some urgency to the task of understanding my gold investment. Unfortunately the factors at play are so grand or so technical (eurozone debt crisis, Chinese growth, futures markets, currencies) that it's hard for a normal human being to get a real feeling for it.

So I turned to a gold market closer to home where I live, Hackney in East London, hoping this might help me 'connect' with my small lump of metal.

Narroway is the main street in Hackney Central, the focal point of the recent riots (video below) and it has five pawnbrokers/jewellers who buy and sell gold (one of them, Fish Brothers, was shut).

I didn't think this market would have much to do with gold ETFs so I took a gold signet ring I was given by a relative.

The first place I went to was called Cashier where staff served customers from behind perspex screens embedded in battered-looking booths. When I arrived there was one guy in shop and he was getting strict instructions not to be late with a loan payment - he had until Saturday.

When he left the woman who served him dealt with me. Yes, she said, I could get cash for the ring but only after a couple of on-the-spot tests. She said she would weigh it first, give me a rough price, and if I wanted to take it further she would do a chemical test.

I've had this ring for decade or so. It had belonged to my great uncle and while I had no real idea what it was worth I was kind of hoping for a nice surprise. My expectations were tempered a little when she pointed to the '.375' hallmark which meant the ring was 9 carat gold (not very pure). But I was still shocked when she offered me £46 - a sum which would have replaced just one of my shoes.

I started asking her questions like where her gold price came from, how often it was updated and (it seemed like a normal question at the time) whether she'd had any customers coming in with gold teeth. At this point she got a little suspicious and I decided to tell her what I was doing.

We had brief chat and, among other things, she said the store was pretty busy and that she'd had a customer in the day before selling gold teeth.

As it turned out Cashier offered me the best price out of four shops I tried. The next best came from a newly opened branch of Albermarle Bond (pictured above) where I was offered £43 for the ring. The girl behind the counter also said the store was busy but no one had been in with gold teeth.

She, and all the other gold buyers, said that most customers generally over estimated the value of their gold trinkets. I confessed that I was one of them.

In retrospect it seems likely that the two shops which offered the best prices for gold (Albermarle and Cashier) really made their money out of payday loans (according to the Wall Street Journal the only booming part of the financials sector in the US).

I suspect that people who hoped to plug a hole in their finances by selling their gold jewellery would be tempted into one of their high interest short term loans.

Hackney Discount Jewellers, which has been on Narroway for 30 years, offered me £40 for the ring. The guy running the shop had a different theory about the higher price being offered for scrap gold at Albermarle Bond and Cashier. He said it was more likely due to the other shops having retail outlets - and so having some control over how much they could make when they sold the gold again.

He said times were hard and that a handful of his customers had been selling gold teeth. He added that thieves had been targeting ostentatious gold wearers.

Next was Erbiller which felt more like a traditional highstreet jewellers - it felt more like a shop that catered for female customers and there were two women looking at rings. The young man behind the counter said that business was slow with fewer people buying jewellery. He only offered me £30 for the ring.

So, the news from the Hackney gold market is that most of the people who are active are selling their gold to make ends meet. My guess is that they are selling their gold because they have to.

Unfortunately, when they walk into a gold shop, like me they'll probably be disappointed by the amount they are offered for their gold. My guess is that this experience will make the high interest loans offered by these places look like a good idea.

But over all, the trend on the Narroway is no buyers, mainly sellers. But these shops are pawn brokers or jewellers, they don't sell the coins and small bars favoured by investors.

Investors are more likely to buy from the likes of ATS Bullion and Baird & Co for physical gold. Or, if they don't want to stash it at home, to ETF Securities or BullionVault.

Hackney has some history on this front and one high profile example was highlighted this year by one of the UK's most successful fund managers, Sebastian Lyon, who runs the £1.4 billion Trojan fund and the £370 million Personal Assets Trust.

Lyon likes gold and has about 13% of these funds' assets in gold - mostly using the same vehicle that I do: exchange traded funds.

In a report to his investors in June he said he said he wasn't worried that the gold price was in bubble: "With only 0.6% of global financial assets invested in gold compared to 3% in 1980 and with the supply of paper money increasing at an exponential rate we are way off bubble territory."

But for a human angle he turned to a recent piece of Hackney history: "Martin Sulzbacher, a German Jewish banker, who hid a hoard of gold coins in a garden in Hackney before being interned in 1940".

Sulzbacher never reclaimed the coins and they were rediscovered 70 years later and returned to his son. Over this period their value increased from $1,640 to £100,000. Lyon pointed out that "paper money would scarcely have preserved wealth at all."

It's the story of one long-dead Hackney gold investor who certainly hadn't meant to lose his gold. I can't say I identify with it, but it does highlight the liklihood that the buying and selling on Narroway doesn't represent all of Hackney's gold reserves.

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.

October 19 2011 gold ETF investor report: what's going on?

Yesterday (October 18 2011) the gold price fell and, subsequently my physical gold ETF (PHAU) shares closed down more than 2%? They've recovered a bit but what happened?

A link to the Google chart of the 18 October 2011 fall of PHAU

A story from Reuters said: "Gold fell for a second session on Tuesday as investors worried about slowing Chinese growth, a warning on France's credit rating and dimming prospects for a solution to the euro zone debt crisis."

To me these are all "known unknowns" - If one expert says one thing I believe it until another expert contradicts it - I have no evidence of my own.

But on Tuesday what I didn't understand was that all of these known unknowns were saying that everything looked bleak for the world economy. So why didn't gold, the investment of choice for fearful people like me, rise on this news?

Was it the same thing that happened last month when the gold price fell alongside share prices on stock exchanges around the world? That fall prompted me to buy my PHAU shares on 22 September. (Markets and gold fell further on Friday 23 September - the day I bought my units in the BlackRock Gold and General fund - and then fell a great deal more on Monday 26 September: here's a Google chart of the fall.)

What were the reasons given for the falls in September? There were some who said it was because the price of owning gold futures was raised (margins) by 21% on Wednesday 23: story in Forbes and Zerohedge. There was a different suggestion from CNN saying it was deflation fears. And then a lot of people were buying dollars (see chart below) as investors looked for a safe haven... but not gold.

I feel I need to understand why gold is moving in the same way as shares when, up until recently, it tended to move in the opposite direction. I also need to have view on whether this new relationship is likely to continue. Unfortunately I can only ask an expert and hope I get the right answer.

For now I'll go with some comments from the Reuters story which pointed to research from CitiFX (part of Citigroup) who said they expect gold to rise above $2,000 an ounce after a correction (the current falls) and eventually trade as high as $3,400.

It said "Gold has gone from being a protection against 'risk off' to a 'risk-off trade' in itself ... We still believe that this market nervousness has further to run in the coming weeks or months" (In other words people don't seem to buy gold to protect themselves anymore.)

The story also points to independent investor Dennis Gartman who plans to halve his gold positions, citing bearish technical signals and prospects of margin-call selling.

All this technical stuff... and I still can't get my head around what's supposed to happen in normal times.

When it is put up against the FTSE 100 over the last year it looks pretty clear that the physical gold ETF generally moves in the opposite direction of the stock market. When share prices rose gold fell and vice versa (click on these charts to enlarge - unless your eyes work properly)

I've included what I hope is a version of this dollar index - bascially the global value of the dollar. This is the value of the dollar against a basket of currencies - I could only find it dating back to April 2011 so that's where I've gone back to.

The relationship between PHAU and the FTSE seems to be changing. A look at their percentage changes appears to show some kind of a change - in September and October they move together more often.

But then there doesn't seem to be much of a change in the relationship between PHAU and the dollar index, other than gold getting a lot more volatile - but that's just from casting an eye over it. I'll have to do something a bit more scientific to find out for sure.

I don't think any of this is going to help me... but I've got to start somewhere.

Is the gold "spot price" real?

I don't own gold I own the 'spot price' of gold

After taking a look at the prospectus for my ETFS Physical Gold (PHAU) shares I'm fairly sure that I'm not really the owner of gold. Yes the shares are backed by real lumps of the stuff in a vault but the chances are that I’ll never get my hands on it.

In reality the gold backing my PHAU shares is more like collateral - it’s what I have a right to if all else fails. Before that happens though, the prospectus for ETFS Physical Gold says my shares are valued at something called the “spot price” of gold (ETFS said that PHAU tracks the loco London spot market).

So what is this “spot price”?

On the face of it, the construction of the gold price appears a bit random. Adrian Ash at UK online gold and silver market BullionVault told me that the price is not standardised, which means it’s not like tracking the share price of Marks and Spencers for which there is a single price quoted through the London Stock Exchange.

So, in the case of gold, the source of the price is not set in stone. Ash says that the data feed that supplies the free online "spot" chart at BullionVault, where he is the head of research, is not likely to be the same as the data feed that supplies, say, the chart at Canadian bullion dealers Kitco and the prices may be slightly different.

This is because the companies that provide the data feeds can pick and choose the sources of the data. These will be dealers who have agreed to pass on their live buying and selling prices. However Ash points out that any difference in price will be minimal because a dealer who deviates far from the global price will either have everyone knocking on their door… or no one.

In general though, the prices that make up the core of the global spot price come from the big banks listed as the “market makers” for the London bullion Market Association – centre of the world's wholesale physical trade.

These include the likes of JPMorgan, HSBC and to be an official ‘market maker’ an institution promises to offer prices at which they will buy and sell gold at all times during the hours of London trading.

But these banks are global so when trading shuts in London it shifts over to New York.

Wherever the trading is going on, the prices offered are being fed to the likes of Bloomberg and Reuters and other data providers who then compile gold “spot prices” for their clients. To do this they take the mid points between the buying and selling prices offered by each market maker and find the average.

Ash said: “So take note – any "spot" price data you see will fail to show any widening of the spread between buying and selling prices during strong volatility.” So investors should look carefully at the difference between the price they are being offered and the gold spot price.

There are further complications to the foundations of the “spot price” and the extent to which it describes the price of physical gold. To start with, the London market makers are not the only sources of data or the only influence on the gold price.

But during London trading hours they are the biggest players and the deals being done in London are for metal and are supposed to be completed within two days. But that’s not the case in other markets that influence the gold price. Ash said that when trading shifts to the USA the biggest gold market open for business becomes the New York futures market – where promises to deliver gold at a specific date are traded, but the vast bulk of contracts are in fact settled for cash, not metal.

Influences like this are somehow factored into the data feeds for “spot gold” prices supplied to traders.

In contrast to the apparently laissez faire price setting – where there can be minor discrepancies – there is no flexibility about the gold that is bought and sold in the loco London spot market.

This is entirely standardised with approved refiners, vaults and traders. If the gold is in the system it is considered good for delivery and if it leaves the system it isn’t allowed back in without severe checks.

Conclusions: Supply and demand, investor fear, interest rates and the value of the dollar are the engines that drive the gold price. But the gold price itself is the speedometer and it seems sensible to check that it's actually measuring what you want it to measure.

The fact that it doesn’t include spreads - the difference between the price at which gold is bought by market makers and the price at which they sell it – essentially means that gold is will not change hands at this price.

It may be useful to find out more about when and why spreads widen and whether the changes are large enough to let them influence an investment decision.

Also, does anyone monitor the differences between gold price data feeds, particularly in times of crisis? Are there any technical dangers in terms of the gold price?

Gold ETF bestseller for retail investors?

The three most heavily bought shares (by value) were the same as the three most heavily sold shares by investors using Hargreaves Lansdown on Friday. These were Barclays, Lloyds and the iShares FTSE 100 exchange traded fund.

The ETFS Physical Gold ETF (PHAU) was one of the few shares on the top twenty list that didn't also make a showing on the list of shares being dumped at high speed by investors.

On Thursday Hargreaves Lansdown published an interim management statement which said that the number of clients opening accounts had increased but added that it wasn't expecting much action from them: "Whilst uncertainty remains about sovereign debt and default and a possible second recession, it is increasingly likely the retail investor will feel they need more pounds in their pocket and may continue to defer new investment decisions."

It's hard to tell if their buying and selling lists illustrate this prediction, or whether retail investors see gold as a kind of cash.

Also on Thursday the Sterling denominated PHGP was the gold ETF of choice (At close on Friday the spreads for PHGP were bid 10,382 offer 10,385 or 0.028% which were narrower than the spreads for the dollar denominated PHAG $164.09 and $162.3 or 0.12% - I was under the impression it was usually the other way around.)