A Leading Online Bank is Trying to Sell You Gold; Should You Bite?

Dollar Savings Direct, a division of Emigrant Bank, now offers depositors a competitive savings rate. After a many year hiatus from the online savings market, Emigrant returns to a competitive position for a company that a decade ago was a pioneer in the online savings space. It remains to be seen whether Emigrant intends to compete for the long-term in the savings and CD arena. At various brief intervals, Emigrant – through Emigrant Direct, Dollar Savings Direct and My Savings Direct – has experimented with attracting depositors with a high rate only to drop the rate, sometimes quite precipitously, after a couple of months.

Since the market meltdown in 2009, Emigrant has also from time-to-time marketed distressed real estate to deposit customers that the bank had repossessed through a “real estate opportunities” link on some of their online banking websites.

Now Dollar Savings Direct (Emigrant) is selling gold.

My personal opinion (no recommendations attached) is that this is a very interesting time to be buying gold. I have never been a gold bug, but it seems to me that the only long term solution for the US to handle its debt is going to be to deflate the value of that debt over time. Therefore, inflation and long-term US dollar rates will need to rise. Likewise, the Trump Administration is prepared to engage in a trade war and to talk down the value of the USD, as Steven Mnuchin did in Davos this morning. I am hesitant to invest in the British pound or the Euro in front of Brexit and the likelihood that the ECB will also race to devalue its currency. I think that anyone investing for more than a couple of hours in emerging market currencies or bitcoin should have his or her head examined. This leaves the shinny yellow metal as an interesting store of value versus the US dollar.

But, the Emigrant proposal just is not yet attractive. While they will deliver the gold that you buy directly to you, most purchasers will opt instead to have them hold and store it for you. Their storage fees, which are layered on top of their transaction fees, are 80 basis points a year. 80 basis points, especially compounded over any length of time, can really take a bite into any appreciation that you are looking to get in the asset (and the asset doesn’t produce any dividends or interest to offset it).

The SPDR Gold Trust (GLD) and the IShares Gold Trust (IAU) represent much more attractive alternatives with better liquidity (tradable any time that the market is open), potential tax advantages of an ETF, and much lower carrying charges. These things aren’t small funds - one is over $36 billion and the other is almost $11 billion - and they are fully vetted by regulators of all sorts and by the media (Bob Pisani of CNBC, among others, went several years ago to see the vaults in London).

I am not a fan of the 40 basis points that GLD charges and the 25 basis points that IAD charges (I think that Blackrock and State Street could charge much less), but these are still less than half of what Dollar Savings Direct or Emigrant are going to charge you to hold the bars for you.

It seems to me that Emigrant is trying to rescue a business model that may have been attractive in an earlier era, but that is largely obviated by ETFs (that of being a custodian for precious metals) on the backs of unsuspecting depositors attracted to their savings rates.