Regardless of the watered down numbers published, China has been buying up gold with a vengeance. The CME reported that precious metal purchases in February were up 48% over last year. Precious metal ownership and investment is becoming more and more important, and the stock market ether is beginning to wear off. Nevertheless, people are flocking to metal ETF’s. Some investors say they enjoy the convenience of “owning metal without the hassle of storage.” But is that really what they’re getting?
The thing that makes gold a “safe haven”, is the fact that it appreciates when most other investment instruments falter (or fail) and you own and hold a physical asset. But if you own a gold ETF, do YOU really OWN a physical asset? Bloomberg recently reported that, “There’s a Rush for Gold ETF’s.” They report that “scared investors” are looking for safety. But a concerned person choosing an investment tool for “safety” must certainly be considering a “worst case scenario.” And in a worst case scenario, safety would dictate that you have free and immediate access to your physical metal investments. However, a recent report explains that there is only around 1 physical ounce of gold for every 330 ETF “paper” ounces.
If the economy were to take a sudden turn for the worse, it naturally follows that there would be a rush to liquidate paper ownership for physical metal, but if only 1 out of every 330 “owners” can take physical ownership, where’s the safety in that?
Here are a few other facts that investors concerned with “safety” should clearly understand:
- Page 11 of GLD’s prospectus clearly states that there is no entity responsible for verifying the fineness or quality of gold held in the vault. So, not only do the bars NOT need to add up to the amount of gold needed to cover the shares printed, but the bars in the vault don’t need to meet a minimum fineness.
- The ETF trustee does not insure the gold. It’s the responsibility of the custodian and their liability is limited to damages to the gold they directly inflict. So realistically, if the bars in the vault are lead painted gold, then as long as the custodian can show that these are the bars originally deposited, they would be protected and the trustee wouldn’t be liable.
- The prospectus also states that the custodian is free to store the gold with sub-custodians until the gold is delivered to the custodian’s main vault, meaning the gold can be in various places at once. Sub-custodians are typically banks who are not responsible for the gold they store, are free to appoint other sub-custodians, and according to the prospectus, “failure by the sub-custodians to exercise due care in the safekeeping of the Trust’s gold bars could result in a loss to the Trust.”
- Finally, considering that most sub-custodians are banks, if they fail, the Trust becomes an unsecured creditor.
So, if you’re considering precious metal “ownership” through ETF’s for safety, then there’s only one question you need to ask yourself. “Are you feeling lucky?”