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Gold ETF Shares Provide Exposure to the Price of Gold But Not Gold Ownership.

by Louis Cammarosano, Smaulgld:

Insured Vaulted Gold vs. Gold ETF Shares.

If you are buying gold for insurance against bad outcomes exchange traded funds (ETFs) have three major issues:

1. If the stock market closes or there is a bank holiday you have no access to trade your shares- when the market opens the price of gold could be dramatically higher or lower;

2. You have NO access whatsoever to EVER take physical delivery of ANY gold, unless you buy an inordinately high number of of shares. This may be an advantage in good times as the ETF covers the storage and insurance (in some cases) costs for you. In bad times, it could be a disadvantage;

and

3. If the ETF is mismanaged and goes bankrupt, you have a claim on the trust NOT a claim an any amount of gold.

If however you, buy allocated, vaulted insured gold and store it outside the banking system in the event of a bank holiday, stock market closure or bankruptcy of the depository, your gold is still available and title resides with you.

If you just want exposure to the price of gold ETFs are fine as trading vehicles.

Inflows to gold ETFs surged in the first half of 2016 as investors sought exposure to the price of gold.

The pithy version is you are not really buying gold when you buy a gold ETF, you are buying exposure to its price fluctuations.

From the GLD and SLV sales material

From GLD

“SPDR Gold Shares are intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that interest through the trading of a security on a regulated stock exchange. The launch of SPDR Gold Shares was intended to lower many of the barriers, such as access, custody, and transaction costs, that had prevented some investors from investing in gold.”

From SLV

Why SLV?

Exposure (emphasis added, not ownership) to the day-to-day movement of the price of silver bullion”

The ETF promoters view the ability to ‘own’ gold without actually owning it as a feature, which it is if you are just trading it. It could also be viewed as a flaw if you want ownership/possession of precious metals.

An analogy: Gold ETFs are akin to buying water futures for price exposure. That work’s unless/until you need delivery of the water in case of a drought, then all you have is a claim on water worth an amount specified in a fiat currency, but no actual water to drink.

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2 comments to Gold ETF Shares Provide Exposure to the Price of Gold But Not Gold Ownership.

  • Craig Escaped Detroit

    Let me get this right. ETF’s give you “exposure” to the “price” of gold (but not ownership of any real gold).

    Well, in THAT case, my FIAT FRN’s give me “exposure” to the “price” of gold and to everything else on the planet, and I don’t have to worry about anybody but ME “mismanaging it”.

    And, I can take my FRN’s and quickly buy REAL PM’s.

    So, ETF’s are a FIAT for FIAT? Another paper substitute for a FIAT nothingness?

    It’s another form of Carnival Scam. Another vehicle to separate people from their FRN’s.

    I still think it’s better to own the real deal and not play around with substitutes.

    • Ed_B

      @Craig

      “I still think it’s better to own the real deal and not play around with substitutes.”

      Of course it is… IF you can. ETFs work well for speed of buying and selling via a few mouse clicks on-line. They also work well if one wishes to make a financial bet on the price of gold or silver and they can bet on a higher or a lower price. Finally, those whose money is locked up in retirement plans that they cannot access for years can buy metals ETFs and gain some exposure to the PMs market that they otherwise would not have. No ETF prospectus that I have seen claims to be able to deliver gold or silver into an investor’s hands. That is not their function and they never claim that it is.

      But ETFs can still play a role in some investor’s saving / investing plans. It’s just a matter of determining if they will work for you in your particular financial situation. If not, then no problem. If they do then one can own some of them and get something to which they otherwise might not have access.

      My wife is not especially PM friendly but I can buy gold and silver ETFs because she sees them as “stocks”. 😉

      I have owned metals ETFs in the past and sold most of them. I still have $9k or so in the SVR silver ETF, which is up about 40% so far this year. It will be cashed out at some point and the profits put into more silver bullion, of which I already own a good chunk. 🙂

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