PNL Personal Assets Trust - some guidance on why I own gold

There were two views on the gold price dropping down today (PHGP down 2.5%):

- on the one hand the gold bugs point to a 'paper-based' assault on the gold price last night: http://www.zerohedge.com/news/2013-09-12/vicious-gold-slamdown-breaks-gold-market-20-seconds?source=email_rt_mc_body&app=n

- on the other hand the gold doubters point to the increasing likelihood of the Federal Reserve tapering off its quantitative easing. In this BullionVault piece analysts suspect more price falls with little chance of this being offset by Indian Jewellery buying or inflation picking up
 https://goldnews.bullionvault.com/gold-price-091220131

Sebastian Lyon at Personal Assets Trust (PNL) said in an interim management statement (August 16):

Retail gold ETF attracts 10 fold more buying than selling

As the gold price continues to fall I rather urgently need to assess my position. However some UK retail gold investors seem to be pretty clear that today presented a buying opportunity. 

The (allegedly) most popular physical gold exchange traded fund for retail investors -  the ETF Securities sterling denominated fund with the London Stock Exchange ticker PHGP -  has seen buyers spending nearly 10 times more than sellers have sold today. With £5.2 million worth of shares bought by investors compared to £650,000 worth of shares sold. (The most popular retail gold ETF? dealt with below)

(Click on images to expand them)

Sterling gold falls under £1000 oz for first time since 2011

The price of gold has fallen below £1000 per ounce (oz) today the lowest its been since 2011.

Gold spot price over the last six hours

According to the gold spot price provided by BullionVault while gold was selling at just above $1,600 per oz the sterling price fell to just over £992 per oz (later under £990 as per chart above).

Gold on Sunday night 11 March 2012

BullionVault's market report from Friday is the only outline I've read of what went on at the end of last week.

Will gold stay in the $1,700 no man's land?

What Ben Bernanke (didn't) say today - did it change the landscape for gold significantly? Or was the exit - triggering the biggest one-day fall in three years - just a short term technical blip (the link quotes Jon Nadler from Kitco who said the fall was spurred by an early 1 million ounce sell order - no doubt that will fuel conspiracy talk). Reuters had the same quoting Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, a Los Angeles-based investment manager with $28 billion in assets: "It's just a pullback, it doesn't feel like it would be the start of a bear market".

I still believe gold is still worth owning - although I don't actually own any! Should I wait to see if it will fall further before buying again?

Some chartists have pointed out that the gold price doesn't tend to hang around $1,700 for long - if it's there it's usually moving up or down at speed.

Tonight it was hovering in that former no man's land.

In sterling that's around £1,066 per ounce which is what I'd be paying as a UK gold ETF investor.

I don't know exactly how much that would be translated into a gold ETF.

When the London Stock Exchange closed at 4.30pm the sterling denominated PHGP physical gold ETF was selling for £105.99 (This ETF is a good indicator for PHAU which is dollar denominated although it is bought and sold in sterling, however it tends to have wider spreads than PHAU and I don't know what the spot price of gold was at that time. 

If I had bought at close today, how would it have compared to past buying and selling?

My boldest and most recent move was selling all of my 28 physical gold ETF shares on 16 December 2011. Back then I got £100.77 per share before fees (fees were £11.95).  If I had bought 10 shares as markets closed today I would have paid £105.90,  more than 5% above what I sold at.

At the time, according to BullionVault's spot chart, the price of gold in sterling was around £1,079 per ounce.

The gold price has fallen a bit further since then but it is now rising again. The question is where it will be when markets open tomorrow morning - and whether I will buy?

Buying at £106 may be a 5% loss compared to the price at which I sold but it is better than my first two purchases at £111 per share on 22 September 2011 and £108 per share on 4 November 2011.

I'm not sure if that is a useful way to judge this - it sounds like an attempt to justify what I do now by comparing it to earlier mistakes. The question is whether I still believe gold is a good longterm investment, whether the US economy is really improving, whether the value of currencies have really been undermined by QE.

Gold on 13 feb 2012

I started this at 11.45am with no particular aim. One thing I'd like to know is whether the gold price will fall a long way if something goes wrong in the eurozone - although that's what everyone is probably wondering.

This morning the price of gold was $1,729 (£1,094) after falling to $1,721  (£1,091) per ounce in early trading (which I saw late last night before I went to bed just as the price starting rising as news of the Greek parliament passing its austerity measures came through - at least that's what I think was going on.)

If I had wanted to buy this morning I would have got 10 PHAU shares for £1,084.85 after fees *(£1,072.9 before fees)

In comparison, on 29 January 2012 10 PHAU shares for $1,086.79 after adding £11.95 trading costs

On 12 December 2011 I bought 10 shares for £104.58 each - £1,057.74 in total (after fees).

On 4 November 2012 I bought 10 shares for £108.01 each - £1,092.10 in total (after fees).


On September 22 I bought 8 sharesfor £111.98 each - £907.78 in total (after fees).


On 13 January I was thinking about buying10 gold shares for £1,062.52 in total (after fees) which wouldn't have been much worse than my best buy rate on 12 December:

This morning my account at Hargreaves  Lansdown shows just  BlackRock Gold and General because that's all I have at the moment and its down a little.

The dollar index against GLD from this Bloomberg chart: http://www.bloomberg.com/quote/DXY:IND/chart

 And here's PHGP (sterling physical gold ETF) vs PHAU (dollar version)

Some of the stories I should look at today: BullionVault covers Peter Grandich - who is Peter Grandich? 

I scanned this from Wall Street Window which said trading margins in gold had been lowered last week which made it cheaper to speculate on futures markets. 

The piece quotes Bart Melek, head of commodity strategy at TD Securities, who said, "In a situation where the financial system may be at risk, people may need a lot of cash to buffer themselves against a potential shock such as a Greek default. They may swap out gold along with other assets for cash.” This is the thing that I am hoping will provide me with another good buying moment. But I am aware that this depends on how bad things get.

Jim Rogers says that gold will not go above $2,000 this year - but that's all he's said - no elaboration apparently.

Michael Hewson of CMC Markets gives his view on Greek deal today and the ongoing risks to its success. 

Wait for a real gold volatility shake out?

I only ask because before the weekend Bloomberg interviewed currency fund manager and gold bull Axel Merk.

He said: "When gold is volatile, we like it. I don’t like that the volatility is so low now. When volatility is high you have only folks who want to own gold for the long term. The momentum traders get out because they can’t handle the volatility.

"When volatility increases, we tend to go into gold. Last summer we took some profits as gold was going up, and we came back into gold a tad too early."

In this piece back in September 2011 Ben Traynor at BullionVault said: "Back then (2008) you had daily price swings – taken as the difference between the PM London Fix price one day to the next – coming in above 4%...above 5%...and, on two occasions (18 Sep. and 24 Nov.) even over 6%. In a single day."

This chart takes the LBMA gold fix daily percentage changes in 2011 (black dotted line) versus 2008 (red line). When I get a chance I'll try and work out how to calculate z scores and how to interpret them.

In the meantime I'm still waiting for a buying opportunity....

Here's what happened to PHAU and PHGP last week: 

Pawnshops vs Gold ETFs: World Gold Council project?

Management at the highstreet pawnbroker Albermarle and Bond have told shareholders the company had a good start to the year and that this had continued into October.

The chart above (click to enlarge) shows the performance of two AIM (Alternative Investment Market) quoted pawnbrokers - H&T (Harvey and Thompson) and Albermarle and Bond - alongside the performance of the ETFS physical gold ETF (PHAU) Google Chart. It shows their share prices have under performed the dollar denominated gold ETF.

Despite the business model of these businesses becoming increasingly linked to the gold price the share prices aren't keeping up - probably due to nervousness around all small companies as the eurozone crisis continues.

This blog's attempts to get to grips with a gold ETF investment led to a number of trips into Hackney pawnbrokers, including Albermarle and Bond. While these pawnshops offer better deals on gold than most jewellers which buy gold - the seller hardly gets a good deal (pawnshops vs ETFs on price).

As far as I can tell pawnshops still prey mainly on poor people - amplifying their problems rather than solving them. (According to pawnbroker H&T, pawn shops are also increasingly used by the middle classes:Pawnbroker note rise in 'middle class' customers.)

Hackney in London, where I live, is full of pawnshops and betting shops. Neither are symbols of a healthy community.

Meanwhile the deals on offer in the UK appear to be worse than those offered in India by India's largest gold pawnbroker, Mathoots. The firm recently opened a store in the South London and the deal it offers is better than most UK pawnbrokers.

May be there's an opportunity here for the World Gold Council to do something useful. The organisation, which is financed by the world's gold miners, has a mission statement to "increase and sustain demand for gold."

The investment side of this has included creating the incredibly successful gold ETFs and now it also supports gold accounts like bullionVault.

But these innovations are for people whose gold ownership is a wealth preserver. Could it do something useful for people who are dealing in gold out of desperation?

It's a selfish argument for some one who owns gold, but it seems pretty obvious that fairer pawn shops would enable more people to maintain ownership.

And if poor people didn't have to sell their gold - often wedding jewellery - at knock down rates only for it to be melted down and sold to investors - the price of gold might be more stable.

(Telegraph story: Pawnbroker thrives in downturn, has interesting comments)

H&T reported a huge rise in the number of people who failed to pay back loans, thus forsaking their jewellery. At the same time this blog found out that Muslims in East London, who are forbidden from paying interest, have been using pawnbrokers, often putting their wedding gold at risk in doing so.

Not only will a pawnshop not take into consideration craftsmanship (even though they sometimes re-sell jewellery) but even the scrap value is highly favourable to the pawnshop.

Then, when a person wants to replace their jewellery they have to pay a huge premium for craftsmanship again.

Surely more people would own gold and trust it if there were fairer ways for them to borrow against it and benefit from its investment value when they need it. Instead pawnshops buy up their jewellery, melt it down and sell it. This, according to precious metals analysts GFMS, was a significant supply of gold last year, and, as such, will have helped keep its price down.

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".

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.

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?