Buying ETFs are risky for gold and silver vs. actual physical metals

Purchasing a bullion-backed exchange-traded fund (ETF) might seem innocuous at first glance. ETFs, including those backed by gold, are securities that mirror the performance of an index, sector, commodity, or asset, tradable like stocks. Gold ETFs, for instance, follow the metal's price, eliminating the need for physical storage and even providing details of held bars on their websites. On the surface, this appears favorable, but upon closer examination, these products are more complex than they seem. Bullion ETFs entail higher risks than many investors recognize, particularly during a significant crisis, where actual possession of the metal may be crucial.

While ETF shares generally reflect gold or silver prices, owning them exposes investors to drawbacks compared to holding physical metal. The fine print in ETF prospectuses reveals loopholes and escape clauses that release the fund from responsibility in various situations, jeopardizing holdings. The foremost reason favoring physical metal over ETF shares is the absence of counterparty risk. Physical ownership means possessing real gold or silver rather than a digital claim on the precious metals, which is unenforceable.

This article explores the inherent structural flaw in all bullion ETFs, outlines three specific risks associated with current ETF products, and emphasizes the fundamental importance of having a significant amount of physical gold and silver on hand.

Imagine receiving a notification when trying to withdraw cash from your bank account stating, "We regret to inform investors that cash withdrawals are not permitted at this time." This scenario actually occurred in Great Britain in 2011, after the Brexit vote, when major investment firms temporarily prohibited fund withdrawals due to extraordinary market conditions. This incident highlights the concept of counterparty risk, where reliance on another party for investment security can endanger the investor if that party fails to meet obligations.

Gold ETFs share similar risks with these funds, particularly concerning counterparty risk. The article outlines three specific counterparty risks associated with gold ETFs:

1. Emergency Liability: The largest gold bullion fund, GLD (SPDR Gold Trust), carries substantial counterparty risk. Statements within its prospectus reveal vulnerabilities, such as the custodian's potential inability to cover losses in case of lost or damaged gold bars.

2. Administrative Oversights: The sponsor of another prominent gold ETF, IAU (iShares Gold Trust), admitted to failing to register new shares with the SEC due to an "administrative oversight." This incident led to unregistered shares being sold, affecting the fund's ability to track the gold price accurately.

3. Relying on Banks: Many bullion ETFs, including GLD, rely on banks for custodianship. The article highlights the case of HSBC, the custodian for GLD, and its history of scandals, raising concerns about entrusting a bank with a dubious track record to safeguard gold holdings.

Furthermore, the article discusses the tax implications of investing in gold ETFs, emphasizing that there is no current tax advantage over owning physical gold.

In conclusion, while bullion ETFs may seem like an attractive investment, the article underscores the substantial risks associated with counterparty vulnerabilities, administrative oversights, and reliance on banks. It advocates for the primary importance of holding physical gold during a crisis, as it provides liquidity and avoids the pitfalls associated with paper forms of gold that come with counterparty risks. Physical gold, in the investor's possession, is portrayed as the most crisis-resistant asset.