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Gold or GLD?
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(December 3, 2004) Gold has finally and decisively broken out of a 12-month trading range of $388 to $428, today closing at another (ho-hum) new 16-year high of $456. Coincidentally, November saw the introduction of a point-and-click gold product, an Exchange Traded Fund (ETF) known as GLD.
“When we read articles written by gold & silver promoters talking about how precious metals prices are going to the moon, we often groan. Serious investors do not like this "cheap" salesman talk. But if you are intellectually honest and realize that these ETFs are remarkable distribution mechanisms (similar to online brokers in the 1990s) which can expand the metals' reach to investors, then you can see how a revolution is about to take place.” – Todd Stein and Steven McIntyre, aka, The Texas Hedge.

“The most significant news of the week for the gold market was the wild success (so far) of the new Exchange Traded Fund for gold. After trading about 6 million on Thursday, we have seen this fund trade about 12 million shares (!!) per day amidst superb liquidity. While its sisters in London and Australia could never measure up to expectations, the US version is certainly going gangbusters. It is still too early to qualify this fund as the panacea that the World Gold Council and gold bugs fervently hoped for, but so far it is most impressive.” – Leonard Kaplan, November 24, 2004, Prospector Asset Management.

Imagine - Gold that you can actually purchase by a simple point-and-click in your brokerage account! GLD, an ETF representing one tenth of a troy ounce of pure gold, debuted a scant two weeks ago, and has already drawn 100 tonnes of sales.

Is trading in GLD the breakthrough that will bring popular acceptance and convenience to gold ownership?

Previously, investors had few choices: trading in gold futures contracts, buying mining company shares, or taking physical possession. The new gold ETF offers some of the advantages of gold ownership, but without the dangers of leveraged trading, the uncertainty of investing in gold mines (as Mark Twain once said, a gold mine is just a hole in the ground with a liar standing next to it) and absent the security considerations inherent in taking physical possession of gold bullion.

Dealers in gold may grouse that they will lose some customers to this new ‘paper gold,’ and believers in physical gold ownership may argue that the very idea of ‘paper gold’ is a paradox. The true beauty of gold, they would say, is that it is NOT paper or electronic blips, but something that you have full physical control over, and can squirrel away or distribute to your heart’s content.

The main disadvantage of GLD is that it’s not really gold at all. You pay your money, and still have nothing in your hand to show for it.

But the lure of digital gold, electronic gold or whatever other virtual gold entities can be dreamed of, are attractive in this age of ultra-efficient e-commerce. Simply put, many people today, perceiving gold’s recently impressive track record, want to own some reasonable gold proxy, though not necessarily gold itself.

Perhaps it’s best to think of GLD as a set of training wheels for ‘newbie’ gold buyers. It gives neophytes the opportunity to buy and sell ‘virtual’ gold. They can take the King of Commodities out for a casual spin, so to speak, and see how the market feels.

In the long run, the new demand generated by the gold ETF will help push gold prices upward. Some GLD buyers will no doubt come to see that gold can be more than just a trading vehicle and dollar hedge. They might eventually want to own some of the real thing. Exposure and familiarity can only be good for the US gold business.

 

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