How To Buy Gold on the Comex

 

January 25, 2008

 

The "Comex" (it is now part of Nymex, which in turn was acquired by the CME) is the primary gold and silver futures market in the U.S. and the world. Buying Comex gold and silver futures contracts for delivery is a good way for medium-size and large accounts to acquire real gold, instead of some sort of paper gold, and not pay too much.

A standard Comex gold contract is for a 100oz. bar. This is smaller than the 400oz. bars that trade on the London market. A 100oz bar, at $880/oz. gold, would cost about $88,000.

To acquire a Comex gold bar, you need a futures account. Many brokers are not willing to go through the delivery process. Ask beforehand. You can try calling John Thorpe of Cannon Trading, who clears through MF Global. (310) 859-9572.

You buy a futures contract and say that you are going to take delivery. The broker would handle things from there.

After you "take delivery," your broker will hold the depository receipt for your gold bar. This identifies a certain gold bar, by serial number and specific weight, and its location. The warehouse will charge a monthly fee for storage of your bar. This might be fine for some people. You now own a specific bar of gold, free and clear and direct. However, I wouldn't trust either the broker to hold my depository receipt, or the warehouse, which might be affiliated with a large bank. The depostories are operated by HSBC, Scotia Mocatta and Brinks. If you want to hold the depository receipt yourself, you then have to tell your broker to send the depository receipt to you personally.

You may want to use an independent depository. First State Depository Company in Wilmington, Delaware is one such depository that provides services to small and large accounts. (www.firststatedepository.com) This is a facility designed for precious metals storage, and holdings are 100% insured by Lloyd's. Is an independent depository more reliable than a Comex depository? I think the odds say that they are. I would hate to find out what would happen if HSBC went bankrupt and you had to show the bankruptcy court judge your warehouse receipt. Some people think that the Comex depositories don't hold all the gold and silver that they say they do. In particular, the recent warehouse holdings reports have been rather suspect, as they show almost no change in either holdings or ownership, while people on the ground are saying that the gold and silver is flowing out at high speed.

Either a Comex or independent depository will charge a fee for storage. The typical fee is about 0.35%-0.50% per year. This is about the same as the management fee on GLD, by the way.

Then comes the process of getting your gold bar from the Comex depository in New York to your independent depository (or your own house or alternative location if you like). You might have to contract a carrier like Brinks to move the gold. Or, you might be able to send it Fedex (insured of course). You can pick it up yourself if you want. Some depositories (including First State) provide an insured delivery service, so you don't need a third party.

Some people, like Jim Sinclair (www.jsmineset.com), have suggested international depositories such as those located in Switzerland. In that case, it might make more sense to buy gold in Switzerland too, in this case probably 400oz. London Bullion Market Association (LBMA) bars or the kilobars popular in Europe. London is the world's biggest market for physical gold.

Then, you have to arrange for pickup. This involves signing the back of the Comex warehouse receipt, and writing a rather detailed letter identifying exactly who is going to get the goods and when. A person at the Comex depository would be able to give the exact details.

This is a rather involved process, but at the end of the day, you acquired some real gold at the lowest price possible. If you need to sell it again, you can arrange to sell it on the Comex, or even through a major coins & bullion dealer. Jules Karp in New York might be good (212-943-5770). You can even sell it on eBay or craigslist if you want to (make sure you get paid before delivery, or use escrow). Maybe your local financial advisor knows someone who wants to buy. However, buying and selling is somewhat hard to do, so you should plan on holding for years or at the very least several months.

For quantities of less than 100oz., I would start to look at 1oz. coins like Krugerrands or Eagles. These have had a rather nasty premium to Comex gold recently -- as high as 30%. However, the premiums have come down a bit. I think that individuals who own hundreds of coins are selling them for a premium and acquiring Comex bars at lower prices. If you can find coins with a premium of 10% or less, I'd look into it. 5% is not bad. The premiums for Krugerrands used to be about 1%, if you are wondering. Keep coins somewhere safe and secret -- NOT a bank safe deposit box.

I still think that Bullionvault (bullionvault.com) and Goldmoney (goldmoney.com) are superior to any form of paper gold, including ETFs, futures, Perth mint certificates, etc. etc. They are relatively cheap, liquid, and have lower transaction costs. However, there is something to be said for owning real metal directly.

You can also buy silver via the same method. The standard Comex contract is for five 1000oz. silver bars. At $12/oz., that's about $60,000 per contract. You have to buy in sets of five, but once you have them, you can sell just one bar if you want. A 1000oz. silver bar weighs about 70lbs. Size-wise, it's seriously more inconvenient than gold.

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What's the difference between gold and GLD? Well ... it's complicated. That is really all you need to know, because owning gold should be simple. Buried under the petunias simple. Or, at least in a depository under your own name. Here is a good description of what GLD really is:

http://www.goldensextant.com/GLD.html#anchor501777

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At Royal Bank of Canada, we trade gold bullion off our foreign exchange desks rather than our commodity desks. Because that’s what it is – a global currency, the only one that is freely tradable and unencumbered by vast quantities of sovereign debt and prior obligations.

It is also the one investment and long-term store of value that cannot be adversely impacted by corrupt corporate management or incompetent politicians, each of which is in ample supply on a global basis.

Don’t measure the Dollar against the Euro, or the Euro against the Yen, but measure all paper currencies against gold, because that’s the ultimate test.

-- Tony Fell, Chairman, Royal Bank of Canada, February 2007

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House Republicans: Cut taxes on lower incomes. While not quite as dramatic as my $50,000/adult tax-free proposal, this House Republican proposal is very much in the same spirit.

http://news.yahoo.com/s/ap/20090123/ap_on_go_co/republicans_economy

"It called for reducing the current 10 percent bracket to 5 percent, affecting a taxpayer's first $8,350 in income, and lowering the existing 15 percent bracket to 10 percent, covering income from $8,351 to $33,950. Small business owners could take a tax deduction equal to 20 percent of their income."

I think it is not such a good idea to press with "Republican Style" tax breaks -- on capgains, dividends, etc. -- at this time. However, if there is a trend toward tax cutting in general, that would tend to suppress the urge to cancel/phase out the Bush-era tax cuts, which would be good if you ask me.

Could House Republicans be reading this blog? Maybe, but I'm really working here with the "100th monkey" effect. I'd rather have a hundred cooks and auto mechanics get on board, at which point the idea would just sort of "pop" into the minds of politicians, without them having to be told anything.

Wikipedia on the Hundredth Monkey Effect

Wikipedia is somewhat critical of the Hundredth Moneky Effect, but it is obvious to me. How do you suppose that, if you talk to 100 people about a gold standard, 99 of them will think it is ridiculous even though every one of those 99 people know absolutely nothing of what they're talking about, and actually never formally learned it anywhere? They just "picked it up" from the ether, the ether in this case coming from the hundred academics who had it pounded into them (using the usual Behavioralist reward/punishment techniques inherent to the tenuring process) by the half-dozen or so money manipulators who wanted to put an end to the gold standard during the 20th century.

* * *

The Traditional City in real life. Now that we've looked at a few photos of traditional cities, I thought it might be good to see how they are used in regular life. It is easy for me to go from a photograph of a street to imagining what life would be like there, but I think most people don't make that connection. I've been watching a rather wonderful Japanese drama called "Shinsengumi," which was aired by NHK in 2004. It is a whopping 48 one-hour episodes in length. Quite the epic. Japan's movie industry is rather moribund, but really fabulous stuff comes out on television -- stuff that makes U.S. television and also most Hollywood movies basically intolerable after a while. This little clip was on YouTube, and even has English subtitles (my Chinese bootleg DVDs only have subtitles in Chinese). It is maybe not ideal, but I think you can get the idea.

I suppose the first thing that people tend to focus on, in these examples, are the little florid oddities of culture at that time. Swords and preposterous hairstyles. This is fun but not really relevant to our overall point. The main point is to observe what life is like without automobiles, in a city that was designed for people walking around. As I've mentioned, this tends to lead to a more aesthetic, artistic environment in many ways, including architecture and clothing, and even so far as manners. NHK's historical dramas have been accused of a sort of every-hair-in-place perfectionism, but in those days I think every hair really was in place. (I used to buy antique kimono from this period. When you see how well they are made, you will understand that one doesn't make, buy and wear something of such quality and not have their hair in place.) Note how every square foot of the environment -- every building, all the spaces between the buildings -- is beautiful. Compare that to today, where maybe the suburban living room and yard is beautiful, but 90% of the surface area of the city is dreck. (This being the case, it is no surprise that people cling desperately to their big suburban houses, which seem like -- in fact they are! -- the only island in a swamp of garbage.)

I would add a European example, but it is harder to find an example of everyday middle-class life in, say, 17th century Amsterdam. (If you have one, send it.) Most movies of the pre-1900 period focus on the aristocrats, and of course they had it good. Very good! But, if I were using a movie depicting 17th century Amsterdam, the point would be the same, because we are talking here about things that are universal.

I think the Traditional City, such as this rendition of 1860s Tokyo, could work very well today -- even almost unchanged. Add electricity, good plumbing and sewage, trains to get here and there, and the Internet of course, and you'd be done pretty much. Wouldn't it be more fun to live in something like this than the crap we put up with today? There is really nothing stopping us, except a failure of imagination.

Remember, too, that this is not a fantasy civilization of elves and fairies. Most of Asia and Europe (not to mention India or the Middle East) had a similarly rich and beautiful culture. Maybe not quite as ... clean ... as that in Japan (the Europeans in particular were a rather smelly bunch), but nevertheless. The real-life accomplishments of "normal people" are so far beyond the best efforts of the "New Urbanists" today that I find it is best just to ignore them completely.

 

If you can't get enough, here are a couple more:

 

Can you believe that building? When I see stuff like this, it pisses me off that I have to put up with such shite buildings today.