ETF gold investing, using an “exchange traded fund,” is a way for investors to invest in the upside potential of gold without actually owning any. In short, you bypass locating a bullion dealer, skip the premiums, and never think twice about how and where you’d store in for safekeeping. Moreover, ETF gold investing trades like a stock, so you also avoid some of the things you may not like about mutual funds. So, the idea is to benefit from lock-step increases in the spot price of gold for no more hassle than it takes to log into your online brokerage account and push “buy.”
ETF Gold Investing Convenience
The aspect of ETF gold investing that gives it teeth, and separates it from a mere digital entry on a computer screen, is the notion of the gold ETF actually buying, and storing, physical gold to back the “paper” you are issued in exchange. This is akin to the way the Federal Reserve Notes we call dollars used to be backed by real money, which is precious metals only (at least according to the U.S. Constitution). You may even remember, or at least your parents will remember, the old Silver Certificate dollars that used to be issued by the Fed. I still have some!
I wonder, however, what would happen if I sought to redeem my silver certificates. Would they give me the underlying value in silver? Just my pause of contemplation, as opposed to my utmost confidence, points to the fact that a paper proxy is never a suitable surrogate for the real thing. Having said that, there are no doubt countless thousands upon thousands who will continue pouring into a gold ETF. And some will use ETF gold investing as a way to expand their physical gold holdings, diversifying by keeping some of their “gold” away from home and potential thieves. For that reason, I want to cover some other basics that should be helpful.
The gold ETF you’re like most familiar with, or most likely to encounter, is GLD. This gold ETF began back in 2004. This is the SPDR Gold Shares, and the physical gold is supposedly held in a London vault. Each of these gold ETF shares is pegged at one-tenth the spot price of gold itself.
ETF Gold Investing Minutiae
Surely next to nobody will heed this advice, but I nevertheless recommend you read the prospectus on GLD, or any other gold ETF for that matter, before investing. The element of surprise can be a pretty gnarly thing when it works against you. And one of the things you might be surprised to learn is that there are more than two parties to this marriage. It’s not quite as simple as the gold ETF holding the yellow metal. There are a number of counterparties to the contract. So, there can be additional custodians, known as sub-custodians, and intermediary holders.
ETF Gold Investing And The Paper Proxy Predicament
There are a couple of other issues should might note as well. First, it would apparently take two law degrees to decode their auditing methods. I have one law degree, and that’s obviously not enough, because I don’t fully get it. At any rate, I at least have some concerns about how much physical gold is being held relative to the outstanding shares of GLD. At the end of the day, all that matters is the real deal. If the gold ETF is highly leveraged via a fractional reserve system, I’m not clear how this is much different than the trouble that the U.S. Dollar is in due to the same.
Finally, on top of there being concerns about the actual amount of gold in reserve, GLD is designed to allow the gold ETF to actually loan out its gold. It can also lease it. If there’s suspicion that the gold ETF is short on the metal anyway, letting some of it out of its grasp is not really something that makes me sleep well at night.
For these reasons, I would never own GLD or any other gold ETF outright. There are some that are certainly better in my view, and I’ve written about them elsewhere. But, if I’m buying paper, I’d much rather own stock in a mining company that’s either producing the goods or else in hot pursuit of them via educated exploration. Alternately, there are a couple of short-term ways to play a gold ETF, but that is beyond the scope of this article.
If interested, I’ve written a companion article on ETF Silver investing you might like to read.