Special Feature: Ten Reasons Why You Should Stay Away from Gold ETFs! (Part I)
ETFs are a popular investment tool. Particularly in the context of conventional portfolio management, ETFs are used regularly in order to obtain efficient access to a diversified allocation in certain markets and sectors. However, when it comes to gold, ETFs are not the first choice. Unless you’re a gold trader, buying and selling gold actively, you need to stay away from gold ETFs. Let me tell you why.
What’s wrong with gold ETFs
After recommending physically allocated metals over ETFs at a recent presentation, one of the participants asked the following: “Frank, what is so bad about gold ETF’s? While I agree with your doubts about their full backing, several ETF’s, even the GLD that you mention, have still mirrored the movement of gold prices fairly well. They are easy to buy and sell. And, the costs involved are lower than any of the physically allocated programs I know of.”
I spent quite some time answering that question. It’s critical. If you’re intent on hedging your exposure to financial markets and the risks of the global banking with gold, you need to do it the right way. I’ll “regurgitate” my response here for your benefit.
First of all, ETFs are generally not as low-cost as you may believe. The cost structures, in fact, tend to be somewhat more opaque and unclear that is generally let on. Therefore, you don’t really know what the costs are. You can be assured, though, that the banks make good money on ETFs.
Secondly, assuming you want to own gold or other precious metals in their physical format -- the REAL TANGIBLE thing -- then an ETF like GLD does not fit the bill.
Yes, GLD is the largest and most prominent gold ETF today. It is a financial product constructed and run by JP Morgan, HSBC and other big Wall Street financial institutions. There are quite a few other gold ETFs in the market and many of them emulate the structure and terms of GLD. Therefore, it makes perfect sense to take a closer look at the GLD ETF in particular.
Ten reasons why you should avoid GLD
In order to thoroughly understand the GLD ETF, or more precisely the “SPDR Gold Trust”, you need to review the product's prospectus as published in May of 2017. As is often the case with prospectuses, they are written in a legalese language that does leave the reader with lots of questions and even more uncertainties. This prospectus is certainly no exception.
Nevertheless, I bravely reviewed it in detail. In all clarity, I have to say, that I would never invest in that product. Amazingly, thousands of other investors did and do… Let me save you some time and summarize the key points of my reasoning.
Here are ten reasons why I recommend avoiding GLD:
1. Dependence on the New York Stock Exchange - For those who acquire precious metals as an insurance against a crisis situation and as a hedge against a financial crisis, access and fluid transaction capability at all times is critical. GLD does not allow for that. It is traded exclusively on the NYSE. During periods of financial crisis, the NYSE regularly stops trading. Therefore, access and the ability to buy and/or sell precious metals through GLD at the time when it is most important may well be restricted.
2. The fund does NOT allow in-kind redemptions of its gold bullion - GLD’s refusal to facilitate any form of in-kind redemption -- in other words, the delivery of physical gold upon request of the investor -- does at least raise questions.
3. GLD does NOT appear to have storage issues - One of the key challenges of a physically allocated gold program is to provide for secure and cost-efficient storage. This is a problem that would be encountered if real gold or silver was involved. When the ZKB Gold ETF, a Swiss gold ETF that does appear to have gold backing (irrespective of other shortcomings) reached around 70 tons, the issuing bank had to find more gold storage space. It was all over the news. No such news is to be found anywhere on GLD. That too raises suspicions.
4. The GLD gold holdings are NOT audited - There are no audits on GLD! As reflected in the excerpts from the fund’s 10-K form below, even ‘monitoring’ is limited. In fact, the sub-custodians don’t have to provide any documentation for proof of the existence of the underlying gold. The obvious question then becomes how an investor is supposed to know there is actually any gold in the vaults at all?
Source: SEC Form 10-K, SPDR Gold Trust
5. The gold holdings of GLD (if there were any?) are NOT insured - The “Trust’s gold may be subject to loss, damage, theft or restriction on access”. These are obviously risk factors that any allocated gold program will face. Solid gold programs deal with it by insuring the value of the gold in storage. In the case of GLD, all risk is passed on to the investor.
Source: Prospectus SPDR® Gold Trust
Be sure to watch for the second-half of Frank’s “Ten Reasons Why You Should Stay Away from Gold ETFs!” at the Global Gold Blog in two weeks. We’ll cover reasons 6-10, as well as share information on an ETF that gets as close as you can get to the “REAL DEAL”.