CDs vs. GLD vs. gold
So, you’re thinking of abandoning green for gold, eh? As usual,
there are trade-offs. As they say in computing, “Faster, better, cheaper. Pick any two”.
| Interest rate |
| CD very low single digits. |
| GLD None, unless you write call options. If you write options you can earn double-digit interest. |
gold NONE, unless you were to sell “naked” call options. That is an advanced investing technique, and
might require you to sell your gold or otherwise raise cash to cover the trade if it didn’t go your way. |
| Capital gains |
| CD Not possible |
| GLD Possibly, but you forfeit some of them if you write call options against your position. |
| gold Possibly, but you must sell to a physical dealer and pay commissions. |
| Capital loss |
| CD NONE (protected up to FDIC insurance limit) |
| GLD Possibly. |
| gold Possibly. |
| Exchange rate insurance |
| CD NONE
|
| GLD put options and stop-loss orders. Stop-loss orders have zero cost, if you have accumulated profit; but may fail if the market moves suddenly down. Puts will not fail in sudden moves, but you pay a premium.
|
gold You may buy GLD puts to insure your physical gold against exchange-rate fluctuations. Even
fairly inexperienced investors may buy puts; but since your gold is not in the account you won’t be able to write
calls to offset the cost, unless you write “naked” calls which is risky. |
| Institutional failure insurance. |
| CD FDIC, currently up to $250,000 |
| GLD SIPC insures against a failure of your broker up to $500,000. OCC insures against counterparty risk on options. Put options insure against a failure of the fund itself, ie, the puts and OCC insure against both fund failure and exchange-rate fluctuations. |
| gold There is no institution involved once you buy, hence no need. |
| Theft insurance |
| CD FDIC, currently up to $250,000. |
| GLD Bullion vaults are heavily guarded, and even if they could get the bullion it’d be a challenge to fence. Nevertheless you can’t discount this possibility; but puts protect you against this also. |
| gold You must purchase theft insurance privately, or you are exposed to a potential 100 percent loss. |
| Nominal carrying cost |
| CDs Bank or credit union fees, usually you can find an institution with none. |
| GLD 0.4% fund expense ratio |
| gold NONE |
| Comissions |
| CD NONE |
| GLD Less than $10/order for the order sizes placed by most investors. $7-10/order + 0.75-$1.50/contract for options depending on your broker. Each contract controlls 100 shares. |
| gold As of this writing, you can expect to pay 4% or more commission from a coin dealer. Purchasing larger ammounts such as kilo bars may reduce this, but they are more difficult to sell. (Concerns about the liquidity of kilo bars fall into the category of “good problems to have”) |
This entry was posted
on Thursday, September 17th, 2009 at 9:44 am and is filed under investing.
You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
