Who “Owns” the Bullion in a Precious Metals ETF?
by David Ranson
Ranson recently conducted an interview with Nick Barisheff (Bullion Buzz, January 5, 2010) on the risks of investing in precious metals ETFs. One of the questions that arose was whether ETFs really provide investors with ownership of physical precious metals. The attractiveness of gold as an investment is not in question; it outperforms in adverse financial conditions and is a leading indicator of asset price movement. GLD has performed well recently, and does reflect the performance of the price of gold bullion. Doubts about the ETF remain, however, because it cannot fulfill an important benefit of holding physical bullion: ownership of an asset whose purchasing power would be unquestionable in the most extreme imaginable breakdown of the financial system or the economy. Private investors must ask themselves whether ownership of ETF shares provides the same degree of safety as if they held title to physical bullion under secure custody. Ranson explores the topic of leased gold; ETFs are permitted to either buy or lease their gold holdings, but it is hard to see how unencumbered title on the part of the ETF would be compatible with the used of leased gold. In conclusion, Ranson writes: “In sum we still cannot determine whether, at any given time, the GLD enjoys unencumbered ownership of the entire amount of the gold that the fund represents, estimated at about $38 billion at the end of January. There is little doubt that precious metal ETFs function as excellent tracking vehicles for bullion prices, at least during normal market conditions… But direct ownership of gold is different from ownership of a security that tracks the gold price, however faithfully it may do so.”www.bmgbullion.com/document/679
Disclosure: there is mention of a mutual fund which Nick Barisheff is the president of.