I have no views as to where it [gold] will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot–and it’s a lot–it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset

— Warren Buffett on CNBC’s Squawk Box on March 9, 2009

Claymore has filed a final prospectus for a new ETF that aims to track the price of gold bullion in US dollars. The ETF achieves this by purchasing and holding physical gold bullion and hedging the fund’s USD currency value back to Canadian dollars. The ETF will trade on the TSX under the ticker symbol CGL.UN. The MER of the fund is capped at 0.50%. However, according to the prospectus, the expense cap excludes “the implementation and on-going operation of an independent review committee under National Instrument 81-107 – Independent Review Committee for Investment Funds (“NI 81-107”), brokerage expenses and commissions, income taxes and withholding taxes, gold settlement fees and any extraordinary expenses.” If past experience with hedging is any indication, hedging is likely to add another 1% in expenses, bringing the total expenses in the range of 1.5%.

As I explained in this earlier post, I’m not sold on the rationale for holding gold in a portfolio. To the extent that an investor wants to add gold bullion to their portfolio and doesn’t care about currency fluctuations, cheaper options such as the SPDR Gold Shares (GLD) (MER of 0.40%) or Central Fund of Canada (which holds silver in addition to gold, has incurred expenses of 0.30% and trades under CEF.A on the TSX) already exist. Investors who would simply like some disaster insurance might simply want to purchase gold bullion such as maple leaf coins or gold bars directly from a dealer and hold them in physical form.

Note: The Personal Finance Clinic has attracted some interesting questions but there may be room for some more. The Clinic closes on May 31, 2009.

Update: The following sentence in the original post was incorrect: “The management fee for the fund is 0.50% and the operating expense is capped at 0.50% for a MER of about 1%”. Som Seif pointed out that the MER of the fund is capped at 0.50% and the post has been edited to reflect the correct information.

This article has 16 comments

  1. That’s a great quote from Buffett. The only thing I can think of that would make this ETF less interesting for my portfolio would be if it had double or triple daily exposure.

  2. @Michael, That would be a totally awesome idea! A leveraged gold market fund. What a great way to collect a bunch of money from foolish investors. I need to look into how to setup this type of ETF to get rich!

    In all seriousness Gold is an interesting asset. It has very little actual value and yet it is very expensive and treasured. I don’t think I will ever put any commodity into my portfolio without it having a real demand in industrial use. Silver is the one most people head to but there are several others to consider. I may pick up some bars of a few precious metals though to look at and have some bragging rights, otherwise I have to agree that investing in dead things isn’t really a good way to make money, invest in companies and the like.

  3. @Cam Birch: I was actually looking at the same thing – buying some gold coins to look at – but for me it was in the form of those “support the 2010 Canadian Olympic team” collectible gold coins offered by the Royal Canadian Mint through the Royal Bank. But when I walked into the bank branch WITH the RBC brochure, nobody in the bank knew anything about the program. They even called around to RBC’s head office and couldn’t find anybody that knew anything about the program (the brochure said just to walk into any branch for details).

    So… I really wanted to support our 2010 Olympic athletes by buying those collectible gold coins but was stymied from doing so by completely unknowledgeable people at my local RBC branch. Why would RBC spend so much time promoting a campaign if they didn’t bother to inform or train any of their staff on it?

  4. I am not a big fan of Gold as well. I could see gold being valuable only in the worst case scenario where the Nazi’s are invading your country and you have to flee fast, while exchanging your freedom for gold since the worthless currency of your own country is not convertible anywhere else..

    Now this is from a person who knows a person who has spent gold to get out of a camp..

    Other than that gold is worthless to me. You get no income from it, it could get stolen from you if you don’t put it in a safe that would cost money each year. Even a simple savings account has outperformed an investment in gold made 30 years ago..

  5. @Phil S, Is it possible that RBC was referencing this: http://www.rbc.com/sponsorship/olympics/vancouver_2010.html

    @Dividend, very true. Even gold isn’t worth anything unless someone wants it from you. Lately its been USD being used instead of gold because the greenback has less market volitility than gold.

  6. Guys, clarity, the MER is NOT 1%, it is 0.50% capped.

    Gold is an important asset class for portfolios, given correlation benefit vs. stocks and bonds. Gold wont give you 20% returns a year generally, but it does do a good job of protecting true value of wealth given in inflationary and deflationary periods. Remember, the goal of investing is to reduce risk…you cannot control the return variable.
    Best Regards
    Som

  7. Canadian Capitalist

    Som: Thanks for your comments. The Management Fee is 0.50%; the operating expenses are capped at 0.50% but the cap excludes certain items noted in the post. MER = Management Fee + Operating Expenses, which could be between 0.50% and 1.0%. But the 0.50% MER is only possible if operating expenses are zero. I don’t see how that is possible given the charges involved in storing gold and insuring it.

    IMO, correlation isn’t the only factor in considering an asset class in a portfolio. The other factor is long-term return expectations. On this score, gold’s real return expectation is zero. Not to mention, gold’s past record of hedging against inflation / deflation is spotty at best.

    • Canadian Capitalist

      Re-reading the prospectus, I believe Som is correct. My apologies and I’m grateful for the correction. The MER is capped at 0.50% and I’ll update the post and enroll in English comprehension lessons.

  8. @Cam Birch. Yes, sort of… The link that you posted are for the $ 0.25 pieces which are collectible but circulating coins… Meaning they only have the 25 cent face value and are made of nickel.

    When they first started the program, they were selling collectible 1-ounce gold and silver 20 dollar coins like the Maple Leaf coins, except that they were not sport-specific and promoted the 2010 Games in general. Those were NOT “circulating coins” and were made from precious metals and it was a limited edition run. I’m sure by now the Mint is all out of them… I used to be a coin collector when I was much younger, but I thought it might be good to have a few of those limited run gold coins, but I never was able to get any from my local RBC branch. 🙁

  9. I don’t see how you can view gold as being any different from any other commodity, like copper, wheat or oil. Who cares if it has any practical use? It has demand. It’s a physical asset with prices that fluctuates based on market conditions.

    I think there are safer investments against inflation. Commodities (including gold), and equities hold up well under inflation. Gold is unique in that tends to do well during times of uncertainty. This is what makes it a good investment – because when the #$%^ hits the fan, everything else underperforms. Gold is there to keep your head above water when everything else is trying to pull you under.

    Under normal circumstances, I wouldn’t keep more then 5-10% of any portfolio in Gold. Right now, I have 35% in gold (mostly miners), simply because I think it’s a good short/medium term investment that will pay out within the next year or two. Also because I’m young, and my portfolio is small, so I tend to make large bets. (I’m a bear market believer)

  10. @Bemerson. I agree but the way that I like to word it is that if you’re concerned about inflation, you should buy into the commodity that is CAUSING the inflation. Real estate, food & beverage, energy… They’re all the places to be… But, even though I like that sector, of course, I don’t want to overpay for those assets.

    Food & beverage is my favorite commodity, but there aren’t very many different publicly listed investments to choose from. My next choice is Real Estate, which is where much more of my investment dollars have been allocated because there are a lot more choices. Energy is my 3rd choice and I do have holdings in that area as well.

  11. I would and do have gold in my portfolio to reduce risk, because it has no counter-party risk.

    Martin Hutchinson has a similar view on gov’t bonds:http://www.moneymorning.com/2009/05/28/government-bonds-not-safe/

    For myself, I would buy bonds from a government which does not devalue its currency.

    As far as I know, that is none of them.

    Your mileage may vary.
    Kplus

  12. GOLD UP NINE YEARS IN A ROW…

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  15. I don’t see how Claymore can claim the MER is capped at 0.50% when the term is nowhere defined in the Prospectus. The IFIC speaking on behalf of mutual funds in Canada defines MER to include fees like brokerage commissions … “The fund company’s administrative costs–including legal and accounting fees, brokerage fees and interest expenses–as well as GST costs comprise the remaining 20 percent of MER fees.” Best for me as an investor is some grand total of the cost, like Total Expense Ratio.