Where’s The Gold In ETF Gold Investments?

ETF gold investing involves the use of exchange traded funds to participate in the price moves of gold and never even go through the process of buying, and later selling, physical bullion. In the nutshell, you’ll never indentify a dealer, contemplate spot price and premiums, and take metal home with you to store.

Since ETF gold investing is as simple as trading a stock, and in fact behaves as such, you similarly bypass a number of the detractions people hurl against mutual funds. So the gameplan is to enjoy correlated returns to the price increase of gold by simply logging on to your trading account and clicking “confirm order.”

ETF gold investing is designed to get its financial validity by the fact that the ETF is supposed to take the proceeds from investors, buy gold, and then store is to “back” the paper (or digital entry) it issued you in return. This is no different than the way the U.S. Federal Reserve Notes used to be backed by precious metal and, therefore, were a proxy for real money in the Constitutional sense and actually had some worth.

Specifically, if you (or your older relatives) have or remember the Silver Certificates, you’ll see that you used to be able to redeem them for bullion, rather than merely inflated goods and services. I actually have some of these for safekeeping, so I can teach my children about drift from honest weights and measures brought American into financial devastation, though I digress.

As you can imagine, it would an act of futility, I believe, seeking to redeem my silver certificates. Do you think they would actually give me silver bullion? The fact that I doubt, instead of being certain I’d walk away with silver in hand, is a great mental exercise for considering the cold, hard reality that having a piece of paper is never really a satisfying substitute for the actual item itself.

At the same time, I have no trouble believing that there will continue to be legions of folks who will perpetuate the massive inflow of capital into ETF gold opportunities. Some may simply use ETF gold investing to broaden their already-existent in-hand gold holdings, arguing that they have diversified storage locations to minimize risk of thieves. Regardless of the reason, I think it’s wise to share some insights to help out future ETF gold consumers.

The ETF gold vehicle you may have most heard of is GLD. This investment started in 2004. It is formally known as the SPDR Gold Shares, with the actual gold being allegedly warehoused in London, England. Every one of the ETF gold shares is supposed to relate to 1/10 of an ounce of gold.

I realize that most people will never read any investment prospectus, but I have to urge you to read the material on GLD and all other ETF gold opportunities before you plunk down your hard-earned cash. You really don’t want to later be blindsided by some of the things you might discover. One of the things I was surprised to learn was how many potential cooks there could be in the kitchen. It’s really not as parsimonious as the ETF housing the metal somewhere. As it turns out, there are a variety of counter parties involved. In other words, there could be extra custodians, which they call sub-custodians, that could end up holding on to the bullion.

On top of that, there are some other discoveries you might like to know. For starters, just realize that it would take a mathematical genius to fully comprehend their auditing procedures. My law degree is certainly not enough to digest all they purport to do. But the bottom line is that I have some hesitation about just how much physical gold might be in storage to back the issued shares of GLD. Paper shuffle aside, all we really care about is how much precious metal is there. And if the ETF gold investment we all know and love as GLD is leveraged and lacking in ample underlying metal, then this seems to me to be the same financial hocus pocus that has brought about the slow death of the U.S. Dollar.

Even beyond worries that there isn’t enough gold to back ETF gold vehicles like GLD, observe that GLD is also authorized to actually lend the gold it does have! As if that’s not enough, it can lease it too. At the end of the day, if the EFT may be skinny on gold to begin with, lending out or leasing that which it does have doesn’t really excite me.

This is a glimpse into some of the reasons why I would never own ETF gold investments such as GLD. Some are indeed better than others, as I’ve mentioned elsewhere. But if I’m exchanging my capital for a digital entry in my online brokerage account, I’d much rather it be for a real mining company that is already mining metal or else in the exploration and/or development phase of the mining process. That’s not to say I’ve never traded ETF gold investments for short-term profits, but these would never even come close to representing my core precious metal holdings as I fear these things could implode under mass redemption attempts.