The Alternatives Available for Precious Metals Investors

Investing in gold and silver – Strategy and Motivation

Precious metal investors have many different motivations for investing in gold, silver and platinum. These motivations can be longer term in nature; like the desire to diversify one’s portfolio with a patient allocation to precious metals, or to hedge against long term erosion of currency value. Alternatively, the investor could be motivated by a more tactical desire to position one’s assets ahead of geopolitical or market turmoil. In this paper we explore various alternatives available when investing in gold and silver, and the costs, benefits, and challenges associated with each. We have analyzed these issues from the perspective of accredited investors, family offices, and institutional investors. We have excluded any discussion of mining equities given that the inherent exposure to management decisions, political challenges, and execution risk make them incomparable to having pure price exposure to an investment in the underlying gold, silver, or platinum.

Investing in gold and silver – What are the current alternatives?

Coins, investor bars, and rounds :

Many reputable coin dealers serve those investing in gold and silver with a wide array of products. These products include legal currency coins produced by government mints, and bars and rounds fabricated by a growing community of private mints. Often, the case is made to investors that these pieces might over time accrue numismatic value, or a market value beyond that of the metal contained in the product. Investors in these assets customarily take physical possession of their holdings, either by delivery to them or by delivery into a secure vault storage account they have arranged. For some investors concerned about temporary breakdown of social order, having physical possession of the coins or bars is their paramount motivation.

The investor considering coin or bar acquisition should be aware of the associated costs and challenges. Associated costs include the premium paid over the price of the metal contained in the piece, shipping costs, vault storage and insurance fees (if storing at a secure vault location), opportunity cost, and the cost of liquidating the position when desired. Coin or bar premiums can be significant as a percentage of the amount invested, meaningfully reducing buying power when investing in gold and silver. This is particularly true in silver, where the premiums relative to the price of the underlying metal often exceed 15%.

Selling a position in these metals can be costly and not all dealers make a two-way market. Bid-ask spreads are often wider on larger volumes, making this a particular challenge for all but small individual investors. Investors can also incur shipping charges to send the coins to the dealer.


Physically – backed Exchange Traded Funds (ETF’s) :

There are a number of ETF’s available to investors which are backed by physical allocated bullion. While the specifics differ among the various ETF’s, most are backed by metal held in secure vault storage. Investors buy shares in these vehicles in their brokerage accounts in precisely the same way as buying shares in publicly listed companies. This ease of buying and selling of positions appeals to many investors who already have established brokerage accounts. This easy and low cost trading feature makes these vehicles an especially useful tool for investing in gold and silver on a short term basis or day trading. The price of most ETF units closely tracks the value of the metal backing each share.

While costs to enter and exit the position are very low, the key drawback of these products is the ongoing cost of management fees. These fees vary depending on the offering and the type of metal held. Some of the larger ETF’s charge management fees of 0.40% for gold backed funds and 0.50% for silver backed funds. A portion of the gold, silver, or platinum backing the ETF is sold each month to cover the cost of these management fees. Therefore, an investor in these shares will expect that the amount of gold, silver, or platinum backing their shares will continuously decline over time. There is a trend in the market where new entrants are offering ETF’s with similar characteristics, but with somewhat lower management expenses.

Other than specific authorized traders generally made up of large investment banks and hedge funds, investors in these funds do not usually have an ability to redeem their investment for physical metal.

Physically backed vault storage programs :

Several physical metal dealers offer accounts backed by a pool of allocated bars. These programs are structured very similarly to ETF’s, but are not traded on an exchange. Instead of buying shares in an ETF, the investor in these programs is buying an undivided interest in a pool of gold, silver, or platinum held by the dealer. The metal backing these accounts is customarily held in commodity form (e.g. 400 oz or 100 oz gold bars, 1,000 oz silver bars) in a secure vault facility.

The key benefit of these programs is a substantially lower cost to buy or sell a metal position as compared to acquiring coins or smaller investor bars and rounds. The cost to buy or sell metal in these programs can be as low as spot price plus 0.50%.

Unlike investors in coins, investor bars, or rounds, many programs do not offer the investor a straightforward mechanism to take direct physical delivery of the underlying metal. Rather, to exit the position, the investor may sell their metal oz to the dealer or to other investors on the dealer’s platform.

During the period the investor holds their metal position, storage and insurance fees accrue and are payable to the dealer. These ongoing fees add up over time: ~0.15% per year for gold and 0.50% per year for silver and platinum.

Summary observations on these alternatives & a new choice for investing in gold and silver :

While the friction costs incurred by an investor to buy and sell their position using these tools varies widely, there is one universal truth about each of these alternatives. Each has an ongoing cost that erodes the investor’s position. The longer the investment is held, the greater the erosion suffered by the investor. Moreover, the old adages that precious metals “pay no dividend or yield” and “are negative carry” are true for each.

Traditionally, central banks and large asset managers have had an additional alternative. These investors could open a relationship with a bullion bank and deposit their gold, silver, or platinum for a period of time in return for a yield. This yield is often used by the depositor to buy even more gold, silver or platinum.

Rather than leave the metal to sit unproductively in a vault, the bullion bank would convert the metal into various forms of inventory needed by industrial users. This way, the deposited gold remains fully backed by metal, but in a number of forms like jewelry, electrical contacts, coins, and mill products. This action provides much needed financing to companies that are the backbone of the precious metal industry. In return for holding the metal in these forms and at these companies, the bullion bank earns a fee.

Two of Kilo’s principals, having been senior team members at one of the largest global bullion banks, observed the significant benefit this process generated for the central bank and institutional investor clients over time. With this experience informing us, we decided to use the efficiencies of modern technology to bring these benefits to smaller institutional investors, family offices and individual investors. The result, our Precious Yield™ account, offers investors the ability to buy and sell gold, silver, and platinum at low spreads, and most importantly, to earn a yield on their investment.

Precious Yield™ – An Evolution in Precious Metal Investing

The Precious Yield™ account allows investors to have the same tools as professional money managers with the flexibility to buy and hold gold, silver, and platinum while earning a yield on their investment.

Investors may buy gold, silver, or platinum directly from Precious Yield™, or we can assist them in converting their existing holdings into deposit balances. The investor may decide to hold these metals on a floating basis, meaning the investor can sell or redeemed for physical delivery at any time. Alternatively, the investor may elect to lock in the deposited metals for a period of time in return for a higher yield rate being paid to them. The investor doesn’t pay any storage fees and instead earns the yield on their position. This yield is paid to the investor and can be used to invest in more gold or silver, or sent to the investor’s account.

We believe this transformation of an investor’s cost into a positive carry provides tremendous benefit to longer term holders of gold, silver, and platinum.

Investing in gold and silver Alternatives – Putting it all together

How much does this Precious Yield™ matter over time? We compared Precious Yield™ to other offerings that charge you for storage, insurance, and/or management fees. The difference was astounding.

In the chart that follows, we compare the cumulative fees charged over a 16 year period for our competitors to the cumulative Precious Yield™ earnings over the equivalent time period.

1 Assumptions:

  1. 1000 oz of gold purchased in 2000 and held to the end of 2017.
  2. All fees based on current fee structure listed on respective service provider websites. If a fee range was given, the midpoint was used. Precious Yield ™ assumed to be 1%.
  3. Bars on graph are cumulative gains and losses – each fee was taken as a percentage of the ending annual gold price. I.e. the fee in the first year based on ending gold price of $272.65 in 2000 for GLD was 40bps on $272.65, leaving $271.56. The difference between these was taken and multiplied by 1000oz for total GLD fees of $1090 in year 1. Results are not compounded.
  4. Assumes all offerings were available in 2000 and continued to be available through the end of 2017.
  5. All sample ETF and storage program fees are modeled after real examples in the precious metals industry.
  6. Only years 2000, 2004, 2008, 2012, and 2017 shown in chart, however trend is consistent across all years.

In the next chart, we compare the total value of a 1,000 oz Precious Yield™ gold investment over a 16 year period to that of our competitors. 2

A Brief Word on Risk

Precious metals fluctuate in value. Investing in gold and silver bears a risk that your investment may decline in value. The Precious Yield™ account is different than holding physical bars and coins or holding metal in an allocated storage service. While physically backed by a pool of metal and metal obligations, Precious Yield™ depositors don’t have a direct claim on a specific allocated bar or coin. This means the Precious Yield™ account isn’t the same as holding allocated coins or bars. It is an additional tool for investors who want the benefits of owning precious metals while earning a yield. Precious Yield is not a bank. There is no FDIC insurance on the Precious Yield™ account.

2 Assumptions:

  1. 1000oz of gold purchased in 2000 and held to the end of 2017.
  2. All fees based on current fee structure listed on respective service provider websites. If a fee range was given, the midpoint was used. Precious Yield ™ assumed to be 1%.
  3. Each fee was taken as a percentage of the total ounces and is compounded. I.e. a 1000oz investment would mean a 40bps fee on 1000oz in year 1. In year 2, it would mean a 40bps fee on 996oz (1000oz minus the 40bps fee in year 1).
  4. Assumes all offerings were available in 2000 and continued to be available through the end of 2017.
  5. All sample ETF and storage program fees are modeled after real examples in the precious metals industry.

Conclusions and How to Begin Earning Your Yield

Precious metal investors have a wide range of alternatives when investing in gold, silver, or platinum prices. Key to selecting the right alternative for a given investor is a thorough understanding of their objectives. Coins, bars, storage programs, and ETF’s all have a place for investors in certain circumstances, but these shouldn’t be held as a core long term holding in your portfolio. For long term investors, we believe the analysis here shows the tremendous benefit to having a positive carry instead of allowing fees to erode your precious metals portfolio’s value.

Please visit our site or contact us to discuss your precious metal investments and the specific implications of earning a yield on your position. Our trading team can help you convert existing metal investments, be they in coin or bar form, or metal in a storage program, into Precious Yield account balances. It’s time to put your precious metal investment to work.

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To discuss how we can help you achieve your metals related objectives, please contact us by your preferred method of communication.

Phone – Trading Desk 1.866.967.7528




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