"Capital Account" host spotlights the pitfalls of the largest gold ETF
Blanchard and Company, Inc. has long warned of the potential pitfalls of owning shares in the GLD, the world's largest gold exchange-traded fund, or ETF. Now a popular business and financial show on the RT network has tackled the issue in a Sept. 18 broadcast that examines the fund's prospectus in detail. The GLD is OK for short-term trading purposes, but it shouldn't substitute as your long-term core holding of physical gold stored securely where you can get it when you need it. Read our analysis here, and watch the video below:
"If you buy shares in a gold ETF like the GLD, for example, which is the largest gold ETF in the world, do you actually own gold? The answer is no," says Lauren Lyster of "Capital Account" (starting at minute 2:50).
"You're effectively buying shares in a fund indexed to the gold market. This is not the same thing as buying physical gold bullion and storing it in allocated vaults. This is a key distinction. In fact, according to the ETF's own prospectus, the average investor can only redeem their gold shares for cash. Only those who have very large holdings in a fund like GLD have the option to redeem their shares for physical gold. This requires somewhere in the neighborhood of 100,000 shares, which translates into millions of dollars, and even then it's a difficult process.
"Also, in the case of GLD, let's take a look at the prospectus, because the trust does not insure its gold, which means it may not have adequate sources of recovery if its gold is lost, damaged, or stolen or destroyed. And this may surprise you when reading the prospectus, as we have: The amount of gold represented by the shares will continue to be reduced during the life of the trust due to the sales of gold necessary to pay the trust expenses irrespective of whether the trading price of the shares rises or falls in response to changes in the price of gold.
"Wait a minute: The so-called pot of gold shrinks? What kind of deal is that? And finally, one more look at the prospectus because 'gold held in the trust's unallocated gold account and any authorized participant's unallocated gold account will not be segregated from the custodian's assets. If the custodian becomes insolvent, its assets may not be adequate to satisfy a claim by the trust or any authorized participant.'
"Now that may sound confusing, but in basic English, sounds like if the custodian -- in this case HSBC -- runs into trouble, it may not be able to make good on your claim.
"So it would appear that the only way to protect yourself as an investor when it comes to ETFs is to do detailed research on the fund, its assets, and carefully review its prospectus, and even then you are still dealing with the counter-party risk. Now this is why some would argue that buying a gold liability, which is what a gold ETF is, defeats the purpose of owning gold in the first place, as precious metals are one of the few asset classes accessible to average investors that are not simultaneously another person's liability."
