When a Gold Investment isn’t Good as Gold

Individual investors looking to protect their savings from unpredictable declines in stocks are increasingly turning to gold.  It’s a smart way to take a portion of your wealth off the table, keeping it safe from market upheavals.  Unfortunately, often when these investors call their brokers they end up getting sidetracked into one of the few precious metals options brokers still control: the gold exchange-traded fund or ETF. The difficulty with a gold ETF is it comes with baggage investors didn’t sign up for.

Brokers like to stress how investors in gold ETFs receive the benefits of investing in gold without incurring shipping and storage charges. What they’re less likely to mention are major blunders like the one suffered by a group of gold ETF investors recently, when it was revealed the manager of BlackRock Inc.’s iShares Gold Trust violated SEC rules, causing the fund to incur penalties and other costs.

The fund’s manager freely admitted he sold almost three hundred million dollars’ worth of fund shares without properly registering them with the SEC.  Publicly he offered a dog-ate-my-homework excuse, casually labeling the illegal move “inadvertent.” Although I’m not a betting man, I’ll wager his customers had a different word for it. The nice thing about physical gold? You get exactly what you pay for.

Even when there isn’t misconduct (or teeth-grinding incompetence) on the part of fund managers, gold ETFs have serious issues brokers hope you won’t notice.  First, it’s not entirely clear just how ETF investors actually own physical gold. Take the SPDR ETF (ticker symbol GLD), for instance.  Though the gold bars owned by GLD are stored in HSBC’s London vault, ordinary investors can’t simply show up to demand their gold bars for instant redemption.

As Agustino Fontevecchia points out in his Forbes article:

‘Only “authorized participants” are allowed to create or redeem shares.  Authorized participants are registered broker-dealers or other securities market participants which have entered into agreements with the trustee and sponsor (these include major Wall Street names like Citi, Goldman Sachs, Morgan Stanley, JPMorgan Chase, and Merrill Lynch-Bank of America, among others)….’

The bottom line: while your money may be big enough to take, you aren’t big enough to take possession of what you bought. Meanwhile, other experts point out that while brokers are happy to sell you endless amounts of paper they insist represents real, physical gold, it’s less clear how much actual gold they have to back it up.

There’s a lot to be said for cutting out all the middlemen with their hands out and owning actual physical gold.  Once you take possession of your gold coins, you can’t receive a summons from a compliance official slapping you on the wrist for failing to register them.

You don’t have to endure after-hours phone calls from a broker encouraging you to short your gold investment now that the yellow metal is climbing in price.  (Yes, investors can and do foolishly short gold ETFs – i.e., attempt to make money, hoping the price of gold will move down). You don’t have to do anything, other than take possession of what you’ve paid for.  Maybe that’s why brokers and other advisors have it in for physical gold – it neatly snips the strings binding you to them.

When you own physical gold, it’s yours to have and hold for as long as you like. Nobody but you can lay claim to it.  The point of a tangible asset is it offers you security in an insecure world – one in which stocks too easily lose value, and ETF managers “forget” to register millions in shares they’re still only too eager to sell to you.

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