The Danger of Gold and Silver ETFs
By Paul Jorgensen
A common way to invest in gold or silver without having to physically store it yourself is through a precious metals ETF. ETF is an abbreviation "exchange-traded fund". It is like a mutual fund that is traded on a stock exchange like a stock, and can be purchased and liquidated very simply through any trading platform, even a discount online brokerage account. ETFs track indices such as the S&P 500, or industries, or in this case a commodity, specifically a precious metal like gold or silver. You purchase shares of the fund, and the fund managers invest that money in gold or silver on your behalf. If the value of metal increases, the value of your fund shares also increases. When you cash out the fund sells your portion of the metals and gives you your money. Theoretically speaking, that is.
The problem with gold ETFs is that unlike possessing physical gold bullion, you never really know what is happening with your gold. You don't even know if any gold is really allocated to you. You certainly don't own any of the fund's assets, the fund owns them. If you read the fine print of the ETF prospectus you will likely find some fishy statements, such as the iShares Silver Trust which states that "The iShares are intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver." What do they mean by "an investment similar to an investment in silver"? That statement is good evidence that not all of your shares are backed by real physical silver. They may be backed by cash, they may be backed by a piece of paper that promises to give the fund some silver in the future, but not every share is backed by the physical bullion you intended to invest in.
Let's say the fund managers are playing with your money in creative ways through futures and whatnot, and make a big mistake and lose a large portion of the fund's assets? The value of your shares could drop like a rock even if the value of gold is skyrocketing at that very moment. That possibility is evident in another quote from the iShares Silver Trust prospectus that says "the liquidity of the iShares may decline and the price of the iShares may fluctuate independently of the price of silver and may fall". There, they admit it. This investment is not an investment in silver, at least not completely. I don't know how likely it is that the fund price will drop independent of the metal's spot price, but one of the major reasons for holding physical gold and silver is to protect your wealth in times of chaos. But in times of chaos I wouldn't be very uncomfortable holding shares in a trust that is owned by a bank. If that bank decided to shut down the trust and default because they don't have the physical metals to back your shares, what could you do about it? It sounds unlikely, but in times of chaos who knows what could happen. That's the point of having a safe haven investment in physical metals.
If you are an active short term trader, ETFs are a reasonable trading vehicle. You can sell your shares easily any time you want, through any trading platform including a discount online brokerage, the buy/sell spread is much more narrow than when buying physical precious metals. The funds basically do follow the movements of the precious metals they are meant to track, so if you plan on making short term trades ETFs are fairly secure. The problem comes through exposing yourself to risk through longterm investment in an ETF. In that case I highly recommend that you be the sole owner of your own physical bullion and personally possess it, either in your home or in an allocated storage facility.
To learn more about investing in gold and other precious metals, visit http://the-gold-market.blogspot.com
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