Gold Exchange Traded Funds continue to be popular due to their general convenience as well as the high value of gold, precious metals, and associated stocks. Also known as EFT’s they are relatively easy to trade to allow you to make the most out of the current opportunity. Yet, you don’t need to physically store anything or having to worry about other security issues.
Yet, it’s worth keeping mind that there are some lesser-known risks that can come with the structure, procedures of Gold ETFs. There is indeed some danger associated with these funds and the potential for a future financial crisis looming on the horizon.
At the same time, public trust in the national and global banking system has been shaken and continues to wane. This can further prompt investors to consider the value of owning physical gold over gold-related stocks and funds. With a question this big bears taking a closer look at the differences between GLD, Gold EFTs, and Gold Bullion.
Understanding The Differences Between GLD and Gold
The biggest and most popular gold ETF is SPDR Gold Trust (GLD). It is an investment fund that essentially possesses physical gold in order to back its shares. The price per share tracks is very closely related to the price of gold. At the same time, GLD trades just like a stock. However, the investors don’t technically own any of that physical gold.
The legal and procedural basis behind this is that you can only request physical delivery of a precious metal if you own a bare minimum of at least 100,000 GLD shares. Which is a number that most GLD investors simply don’t hold. Especially when you consider that at roughly $1,000, 100,000 GLD shares would be more than a million dollars!
At the same time, the GLD ETF makes it a point to reserve the right to settle your delivery request by providing you with cash, which doesn’t have the same value in a financial crisis as physical gold! Still, even with the long-term inherent risks of owning an ETF like GLD, it can still be a great way to gain value in your portfolio.
Insights On Risk Levels
When viewed from the perspective of your portfolio’s health and value Gold ETFs are a very sound investment. However, they do come with a fair amount of counterparty risk in their chain of custody. These risks can be further increased in times of financial instability.
Ultimately, if you invest in GLD, you must rely on a counterparty to back and secure your investment. If this counterparty has an issue with the fund’s management, internal structure, the physical chain of custody, or regulatory oversight, your investment is placed at risk, in a situation that is beyond your immediate control.
These concerns can easily fill your head with the kinds of questions that will leave you tossing and turning at night!
On the other side of the coin, physically holding gold can also serve as your last line of financial defense during an economic crisis. It is essentially the most secure form of wealth insurance. At the same time, gold ETFs are essentially a part of the very banking system that prompts people to consider owning physical gold.
A Closer Look At Counterparty Risks
When you invest in shares of GLD and other ETF’s backed by precious metals there are several potential pitfalls that can occur at different levels. Any one of them can put your investment capital and your financial security at risk.
The First Point OF Risk: The Custodian
When you rebalance your portfolio to include GLD you become what is called an “Authorized Participant.” This essentially means that a large financial institution is charged with obtaining the underlying assets necessary to back your ETF shares in full faith.
When this happens, the fund’s trustee is essentially tasked with buying shares of the SPDR Gold Trust. The trustee employs a custodian like HSBC to securely source and stores the physical gold that backs the investment.
The Second Point Of Risk: The Sub-Custodian
A Gold Trust will sometimes use one or more sub-custodians to source and store physical gold. This might be a back or other financial institution with security protocols that must meet a minimal level of regulation. This essentially means that yet another counterparty is responsible for your investment at one or more points in the process!
The Third Point Of Risk: The Actual Trustee
It’s worth noting that there technically is no written contractual agreement existing between sub-custodians and the trustees as well as the custodians. This basically means that if a sub-custodian fails to perform their duties effectively that the trustee or the custodian has limited legal options to enforce compliance or recoup the loss.
What this ultimately means is that a fund’s trustee is the only one who is truly liable for any negligence. Yet a trustee does insure the physical gold for gross negligence. It is the custodian, who must secure limited general insurance coverage for all items of value held within their vaults. In some of these cases, the value of the gold in a single vault or vault system may very well be greater than their limited policy would cover.
All of these loopholes and potential pitfalls mean that there are some very real physical risk and fraud risk in the system, which could leave your important investment vulnerable!
Understanding The Benefits Of Physical Gold
From the closer look that we’ve just taken, it’s clear that things like the GLD ETF are not as secure as an investor may be led to believe. In a scenario where a severe financial crisis rocks the global economy, you would have little to no security from shares of a GLD ETF.
This simple fact encourages many serious investors to allocate a portion of their investments into gold bullion. This investment strategy essentially refers to specific pieces of physical gold or other precious metals that are held in your name and title. It is essentially gold that you own outright.
By owning physical gold bullion, you can never suffer a default from a counterparty’s failure to make good on your investment contract. Once you own it, the gold bullion doesn’t require the backing of any government, bank, financial institution, or brokerage firm.
It’s also worth noting that gold also has physical characteristics that help it retain or even increase its value in economically unstable conditions.
Gold is almost always liquid and can be quickly converted to cash. Its density for its size means that you can easily transport a significant amount in a small quantity. Around $50,000 of gold can be transported in something like a small coin tube.
Gold is also divisible, as well as durable. In the case of something like diamonds and precious gemstones, dividing them, or breaking them up decreases the total value. With gold, it retains the same value, whether it’s in the form of a gold bar or ten gold coins. Gold also will not chemically combine with anything other than itself, so it cannot be diluted or cut with another metal.
It also history backing its general value. Since the dawn of civilization gold has always been valuable as a precious metal, ornamentation, form of currency, and today it’s physical properties even means it can be used in electronic devices.
Ways To Source And Buy Gold
In the past, purchasing gold bullion meant that you had to find a reputable dealer, arrange for a storage facility, and then also coordinate things like insurance, transport, and delivery. These days investors have easy access to online platforms which make buying gold just as easy as purchasing or trading GLD ETFs.
This allows you to conveniently purchase and store gold bullion through a full-service investing program that takes care of all the important details and houses it under one roof. These platforms allow you to buy and sell gold bullion at any time or day as well as securely manage your trading account online.