What is an Exchange-Traded Fund?
An exchange-traded fund (or ETF) is an investment traded on stock exchanges that represents an asset and trades at near the net value of that asset. ETFs are low cost, tax efficient, stock-like features. However, the only holders that can actually obtain shares, or actual physical portions of the underlying asset are so-called authorized participants, which are typically large institutional investors, and only in large portions of shares.
What is a Gold ETF?
A Gold ETF is a legal trust that functions by tracking the price of gold after trust expenses. It stands as a "derivative" because it is a piece of paper that is derived from the movement of the underlying asset, gold. It is also a derivative because a Gold ETF shareholder can never take physical possession of any of the gold, unless the shareholder owns 100,000 or more shares. GLD is one type of a Gold ETF.
Why does GLD lack the benefits of physical gold ownership?
The value of the price of GLD stock and the value of the Trust have the potential to experience enormous losses, and under specific circumstances may lose value entirely. As outlined in the GLD Prospectus the following are elements, which make GLD an unsafe investment:
- Owning GLD is not an investment in actual gold.
- The legal structuring of GLD allows for unsuspecting investors to potentially lose all of their money.
- The structure of the GLD Trust makes it impossible to determine if the gold in the Trust is being leased. This is problematic because if the Trust is leasing gold there are inherent difficulties in replacing the leased gold should it be defaulted upon. If this is the case, shareholders have nearly no legal ability to seek recovery from the Trust or the Custodian.
- GLD does not promise that any gold is in the Trust.
- There is no legal way to make the Trustee or Custodian (the gold holder, which is leasing the gold from the Trustee) prove that the Custodian has its leased gold in its vault. In addition, the Custodian can use "subcustodians" to keep the gold. And, the subcustodians can use their own subcustodians.
- Legal barriers set up in the GLD Trust prevent anyone from physically verifying that the GLD Trust holds more than just an IOU. The Trustee and the Custodian may not monitor or visit the site of any subcustodians, or subcustodians of the subcustodians, to verify that their leased gold is in fact in their vault.
- Subcustodians do not need to cooperate in Trustee reviews of the facilities, procedures, records or creditworthiness of said subcustodians.
- The Prospectus outlines that there will be no written contractual agreements between subcustodians and the Custodian or the Trustee, thereby making it impossible to have legal repercussions for the misuse or loss of leased gold. The Prospectus further states that "failure by the subcustodians to exercise due care in the safekeeping of the Trust's gold could result in a loss to the Trust."
GLD vs. Physical Gold Ownership
Investing in GLD is not at all the same as investing in physical gold. In addition to the above factors, GLD fails to accurately reflect the price of gold. The premiums on physical gold products have grown from 10% to 40% over the spot price of gold over the past five years. This is not reflected in the price of GLD. If you invest in GLD with the intention of selling it in the future and using the profits to buy physical gold, you will find that your proceeds from GLD will purchase significantly less gold than your paper investment in GLD cause you to believe.
While physical gold ownership allows you to have privacy, ease of liquidity, potential for growth and security against unstable financial institutions, GLD offers none of these things. Investing in GLD involves taking the risk of being victimized by the drastically misleading financial and accounting schemes that have infiltrated the same U.S. financial systems that you are protected from with physical gold ownership.