Is Paper Gold A Safe Investment?

Includes: GLD, SLV
by: DeWayne Reeves

If you own shares in a Gold or Silver ETF can you sell those shares today and receive in exchange "real" dollars? Yes. Is there a chance that Gold and Silver ETFs will continue to shine and perhaps experience an upcoming banner year? Yes.

However, I believe that many investors are under the belief that owning shares of GLD means that part of their investment portfolio is actually in a tangible precious metal asset i.e, Gold. The truth is, nothing could be farther from the truth. Is that fact clearly disclosed in the prospectus? Yes it is.

Do I think GLD and SLV are adequate short- to mid-term trading vehicles? Yes. In that respect they are as "real" as a Comex Gold or Silver Futures Contract. In fact they are almost as "real" as a warehouse receipt. The real truth in regards to any of the above is this - You only own the idea of owning Gold. You own a piece of paper.

As long as an investor clearly understands the difference, and knowingly chooses to own an idea and not physical Gold or Silver, then he understands the risk he faces. If you do not clearly understand the risk, read the prospectus completely, consult with a licensed investment professional, and talk to investors at MF Global who were quite certain they owned physical Gold. They even had the paper to prove it.

As you read the prospectus these are some of the things you want to consider -

  • Shares are not redeemable for physical gold.
  • ETF gold holdings are vulnerable to excessive leveraging by as much as 100:1.
  • Custodianship of gold holdings is not audited.
  • ETFs don’t disclose their actual, physical gold holdings.
  • Gold holdings are regularly sold to offset management & other fees.
  • Shareholders do not have the protections associated with ownership of shares in an investment company registered under the Investment Company Act of 1940 or the protections afforded by the CEA.
  • The Trust may be required to terminate and liquidate at a time that is disadvantageous to Shareholders.
  • Redemption orders are subject to postponement, suspension or rejection by the Trustee under certain circumstances.
  • Shareholders do not have the rights enjoyed by investors in certain other vehicles.
  • The Trust’s gold may be subject to loss, damage, theft or restriction on access.
  • The Trust does not insure its gold.
  • Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss.

Again, in all fairness and as previously stated, Gold and Silver ETFs are easily bought and sold in today's market. Therefore, to facilitate short-term trading this vehicle may satisfy your objectives perfectly.

One final question to ask yourself, how realistic is the current price of Gold?

Imagine what the price of Gold and Silver might be today if all the money spent buying an idea had actually been spent buying real Gold and real Silver. Things that make you go hmmmm...

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.