Beware of ETFs Pretending to be Equal to Physical Gold
Elaine is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“If you are at the poker table and you can’t spot the sucker, it’s probably you.” Hinde Capital 2010
With the world-wide economic unrest and President Obama pushing to raise the $16.4 trillion debt ceiling, the value of the American dollar continues to shrink. The mighty dollar has lost favor in the world’s financial circles. The fact that America has a $16.4 trillion debt and is requesting permission to raise the debt ceiling is an alarm bell. The trend is steadily shifting from the dollar toward precious metals as the most stable long term value. Precious metals have been a hedge against paper currency throughout history.
Why would Germany, Venezuela and Ecuador repatriate their physical gold if the dollar was stable and strong? Central banks are purchasing gold at a 50 year high. As the dollar weakens, the price of gold increases. Wealth does not disappear; we are living in the greatest wealth redistribution of our lives. Every Fool knows which end of the wealth transfer they prefer.
Gold has had a roller coaster ride, but the trend remains steadily upward since 2008. Let me preface my remarks with the awareness that every bubble has its breaking point. We have seen the gold bubble burst in the 80s and then the housing bubble collapse. Every Fool knows to be ahead of the curve; the trend is anticipated to remain upward for at least another year.
Facts about physical gold and paper gold
You know why gold is this investor’s hot pick, but how do you acquire gold in the wisest manner? ETFs are a popular way to invest in gold and silver because they are easily accessible, but are they the best selection for your investment choice? SPDR Gold Shares : GLD) is the largest physically gold-backed ETF in the world. At last report, GLD held 1,200 tons of gold. The chart below depicts GLD for the last fiscal year.
So, what’s the problem?
There are several problems. An ETF is like a stock but without any of the rights. Purchasing a share of stock means you own a percentage of that specific company. An ETF represents a share in a pool; a single ETF can represent part ownership in hundreds to thousands of individual securities.
GLD is a paper certificate representing a quantity of gold rather than a specific gold coin or bar. A specific purity percentage is not guaranteed in a GLD ETF as it is in a specific coin or bar. The major caution about paper gold (GLD) is that if more certificates were sold than the amount of physical gold to back those certificates, you may own paper which cannot be redeemed for the physical metal. If there is an insufficient supply of physical gold to back the certificate, it is similar to receiving a court judgment which you know you will never collect.
GLD ETF is similar to gold in that both represent a value related to gold.
GLD may or may not track the bullion price. The physical metal has had its surges and pullbacks but has maintained a steady upward climb. Compare the ETF price to the spot price of the physical metal.
There is no danger of being oversold with physical gold as there is with a paper certificate. Physical gold is tactile; you hold it, you own it. If coins or bars are not available, they are not sold. Physical gold has a 24 hour liquidity where GLD is only sold when someone else is willing to purchase it.
GLD ETFs are paper certificates frequently backed by government entities and thus easily confiscated. Gold bullion is insurable just as a fine piece of jewelry or other tangible asset; however, ETF’s are rarely, if ever, insured.
GLD and SLV ETFs are subject to management fees where the physical gold is not.
GLD (gold) and SLV (silver) ETFs are convenient to purchase on all major stock exchanges.
Gold Eagles, my preference, or gold bars are 0.9999 fineness grade legal tender LBMA. My personal purchasing preference for gold Eagles is GoldSilver.com; 24 hour turnaround time, excellent spot price without a “handling fee” and exceptional customer service for purchasing and selling.
Everbank – Market-Safe CD – gold and silver certificates – (upside potential when the market increases with no danger of any loss of principle. Though these CDs are not currently available, new issues are expected in a few months.) Certificates expiring the end of August 2012 received returns of over 90% over the life of the certificate on both the gold and the silver certificates.
GLD has the potential of losing the initial purchase price as does physical gold where the market-safe cd’s guarantee no loss in principle.
Breaking News – Why You Should Purchase Gold
Germany’s Central Bank, The Bundesbank, has announced the decision to repatriate their gold reserves. This bold move has been prompted by the ongoing global crisis. As of December 31, 2012, 69 percent of Germany’s gold was vaulted in New York, London and Paris. With this bold shift, 11% will be pulled out of France and 8% pulled out of the U.S. This will bring Germany’s gold holdings in country to 50% by December 31, 2020.
Germany’s gold holdings of 3391.3 tons are second only to the 8133.5 tons which the United States allegedly holds.
Allegedly? The Fed has requested seven years and eleven months in order to return 271.304 ton of Germany’s gold. My brain says there is only one reason for this lengthy time span. All of the gold has been pledged or used as collateral for other loans and is not available to be shipped to Germany. Even though each bar contains a serial number, banks have been allow to do gold swaps or leases; these accounting adjustments are made to control gold prices and maintain the respective balance sheets.
Heads Up – How Can You Profit?
Confidence among the largest central banks and governments is shaking in its financial boots. Could this be a signal of systematic disintegration similar to the end of the Bretton Woods era? A similar situation was a precursor to the precious metals bull market of 1971-1980.
What does this mean to you as investors? If the Fed does not have the physical gold and needs to purchase it on the open market, this is a monumental opportunity for investors. Expect an upswing in the price of gold. If Ireland, Switzerland, Belgium, Netherlands and Romania also follow through on their rumblings about repatriating their gold, there will be even more of a bull market for gold and silver. Seriously consider transferring dollars into physical precious metals. A bull market will increase the probability of selling more ETF GLD (paper gold) than the quantity of physical gold to back the certificates.
Michael Maloney of GoldSilver.com and author of Guide to Investing in Gold and Silver, firmly believes, “If you can’t hold it, you don’t own it.” i.e. paper certificates are not real gold.
The ETFs GLD and SLV are easy to purchase, but hold significantly more risks than owning the physical gold or silver coins and bars. In every tumultuous world economy, gold has always been the sold financial currency. Face facts, we are living in world economic upheaval right now. I’m hedging my bets, holding on to physical gold and watching the world markets.
I own gold eagles from Everbank and GoldSilver.com. I did own Market-safe CDs from Everbank. I owned GLD and SLV before I knew better.