GOLD ETF vs XAUUSD.

[danclarkie]

Hi, MMM.

I've a n00b question that i really cant figure out.

I decided that I would like to allocate a small percentage of my portfolio to commodities for the diversification.

I'm a non-US national living in Singapore, so for tax reasons I'm almost entirely invested in Irish domiciled funds that trade on the London Stock Exchange, traded in USD.

I found a USD Gold ETf that is Irish domiciled (Though it doesn't really matter as they don't pay dividends) and was planning to invest $15,000 into the fund.

This would take $15,000 out of my account and lock it up in the ETF and give me $15,000 exposure to the price of Gold.

Like this: IGLN

However, I saw my portfolio also has the ability to trade, what I assume is a forex position, on XAUUSD.

Like this: XAUUSD
This would give me $15,000 exposure to the price of gold but on Margin and leave the majority of the money in my account that I could then invest elsewhere.

 

If my desire is simply to add some exposure to Gold to my portfolio as a diversification, what are the downsides to buying the XAUUSD vs the Gold ETF?

I have a large margin in my brokerage (around $200k) that is currently entirely unused and would be able to produce enough cash to close the position if it went against me by 5-10k if required, though I'd prefer to just keep holding it.

 

What am I not understanding about this and why would I not do this rather than locking up funds in an ETF?

Thanks!

[danclarkie]

Yep, I don't want to hold physical gold, I'm just looking for exposure to the asset for portfolio diversification.

I'm actually considering exposure to a basket of precious metals, possibly along the lines of:

50% Gold
30% Silver
10% Platinum
10% Palladium

For a total of 10% of my portfolio.

I'm just really trying to understand the above and what I'm not understanding about the exposure to the asset directly with a forex trade using my margin and keeping my capital.

[Tyler]

I personally really like gold in a portfolio and own a good chunk of IAU, but I suspect you're over-thinking it with the margin account. 

Trading on margin is something that I believe your average retail investor has absolutely no business messing with.  First, it carries very high fees.  Perhaps your brokerage is different, but 7-8% interest for your level of investment is very common here in the US and expecting to beat that cost with the return on other investments is not at all a safe bet.  And second, margin calls can get you into a lot of unnecessary trouble if you don't know what you're doing.  IMHO, stick with investing on a cash basis and you'll be a lot better off. 

[ysette9]

What is your goal with all of this complexity? Why not a simple mix of broad index funds and then go find another hobby that doesn’t carry so much risk?

[danclarkie]

I personally really like gold in a portfolio and own a good chunk of IAU, but I suspect you're over-thinking it with the margin account. 

Trading on margin is something that I believe your average retail investor has absolutely no business messing with.  First, it carries very high fees.  Perhaps your brokerage is different, but 7-8% interest for your level of investment is very common here in the US and expecting to beat that cost with the return on other investments is not at all a safe bet.  And second, margin calls can get you into a lot of unnecessary trouble if you don't know what you're doing.  IMHO, stick with investing on a cash basis and you'll be a lot better off.

Thanks for this, I will certainly look at the margin costs with my brokerage before I think about moving forward with this.

[danclarkie]

What is your goal with all of this complexity? Why not a simple mix of broad index funds and then go find another hobby that doesn’t carry so much risk?

It's more of an intellectual exercise to understand the options available.

If the cost of exposure to precious metals on margin is a low percent, and I could put that money into another asset (most likely bonds) that can yield more than the margin cost, I could theoretically get more exposure to a non-correlated asset class than I would get with buy and hold ETFs, and increase the efficiency of my portfolio.

Finance is my hobby and I'm not entirely clear on the risk so I made the post :)