ARE GOLD ETF’S SAFE TO INVEST?

DON’T HOLD GOLD AT HOME, IN ETF, IN BANK INCL. BANK SAFE DEPOSIT BOX

Gold held for wealth preservation purposes must be held in physical form and outside the banking system. The more counterparties between yourself and your gold, the higher the risk. But there must always be one counterparty. If you hide your gold in a hole in the ground, the hole is your counterparty. Someone might steal the gold or threaten your wife or children to find out where the gold is hidden.

When you hold gold to protect against all the risks in the world, you clearly don’t want to hold it in a bank. We have seen so many examples of the bank not having the physical bars when clients intended to move the gold from the bank vault to private vaults. So even when the banks tell the client they have allocated physical gold, the gold is sometimes not there. Until now, the bank has rectified the situation by buying new bars. But one day when the system is under pressure, there might be no gold available or the bank is under financial distress and is not in a position to buy new gold.

Gold in personal bank safe deposit boxes is not advisable either since you might not get access to it for a very long time if the bank closes. Also, the contents of a safe deposit box is not insured and the bank does not take responsibility, if the contents is stolen. There are also multiple examples of safe deposit boxes being drilled open by the authorities for various reasons.

Many gold investors buy gold ETFs. This is a very big market with 2,800 tonnes held in total by gold ETFs. This represents a value of $135 billion.

Both institutions and wealthy individuals use gold ETFs to invest in gold. But since gold is the ultimate wealth preservation assets it should not be held in paper form.

Let me explain some of the drawbacks with gold ETFs:

  • It is paper gold. All the investor has is a piece of paper saying he owns X shares in the ETF.
  • The investment is held within the financial system and in case of a default, the investor might not get his investment back.
  • In theory, the ETF should have 100% gold backing, but in reality very few do. If you read the fine print, they don’t have to hold the physical gold but can have a commitment or IOU from a bullion bank.
  • Recent trading in the physical market proves this point. In August, gold ETFs increased their holdings by 122 tonnes or $6 billion. This is an increase of 5% which is substantial for one month. The total increase for the period June to August was 312 tonnes or 12%. Yet, Swiss refiners have reported extremely low physical outflow and no buying from ETFs during that period.
  • Gold ETFs normally never buy in the open market or from refiners. So where do they get their gold from. Well it is really just book entries. The custodian of the biggest gold ETF, called SPDR or GLD, is HSBC bank. Sub-custodians are LBMA banks like JP Morgan, Barclays or even the Bank of England.
  • These custodians also hold Central Bank Gold. So when the ETFs need to acquire additional gold, like in August, the custodians just do a few book entries, using the gold they hold for central banks. It is very likely that some or much of this gold is double counted and belongs to more than one party. This is why there is no physical movement from refiners.
  • Most ETFs don’t allow that clients take physical delivery. In theory, a holder of at least 100 GLD shares can take delivery. But this means a minimum of $14 million. GLD also has the right to settle in cash.
  • GLD gold held with sub-custodians cannot be inspected.
  • GLD gold is not insured.

It is extremely difficult to understand that major investors can accept to hold a wealth preservation asset and insurance against a rotten financial system in paper form like a gold ETF. If there is a financial crisis they are unlikely to get their hands on neither the gold nor the cash that the gold represents.

Why take this risk when you can hold physical gold outside the financial system in for example the safest vault in the world in the Swiss Alps. The holder of the gold holds it directly in his name with direct access to the gold. Also, the cost is similar to GLD but it includes insurance and the investors own physical gold that he has direct access to.

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