By John Fisher
In my previous articles, I have been fairly bearish on the investment vehicles and options I have described. You will find me to be more bullish on ETFs when applied properly. With that said, I will still provide you with both the pros and the cons of each investment vehicle I present.
ETFs have brought investment in commodities to the forefront. With a modest investment an investor can purchase shares theoretically representing 1/10 oz of physical gold and, depending on the fund, either 1 or 10 ounces of physical silver.
The convenience of “owning” gold and silver in an ETF is very attractive. Gone are the impediments to physical ownership – delivery, storage and insurance. The market for shares of the fund is very liquid, making trading easy. In addition, the buy/sell spreads for the shares are typically much less than for physical metals. Some of the funds even allow the investor to surrender their shares and take delivery of the physical commodity.
But have you read the fine print? GLD, whom many will recognize as the largest gold ETF, notes in their prospectus:
- Auditors will not audit sub-custodians (all ETFs utilize sub-custodians) to verify the existence or title of gold being held to cover shares outstanding
- The fund may also hold cash in lieu of physical metal
- It may lease out its gold holdings to other entities
- The prospectus states that there is no insurance on the physical assets that would protect investors against losses
- It is acknowledged that some of the fund’s assets are potentially subject to creditors claims should the primary custodian (HSBC) fail.
- The fund has the discretion to return to investors their original investment instead of delivering physical metal, even if the shareholder requests such
Most individuals (and institutions) are not aware of these risks when they purchase precious metals ETFs. Most such funds have loopholes similar to those above. As long as everything operates normally, the risk is mitigated. However, the right (or wrong) type of financial crisis could leave investors with shares worth little or nothing.
Several analysts agree there is a place for precious metals ETFs, especially for short term trading purposes, but not for long-term insurance holdings. I happen to agree. I also believe that ETFs are especially applicable in should be used in qualified plans such as IRAs, 401ks, ESAs and 529 plans.
Finally, it should be remembered that precious metals ETFs are a stock traded on a public exchange. They are a piece of paper – a stock certificate. They are not gold. They are not silver. Don’t confuse the two. When you buy a stock, you enter into a counter party relationship with the issuer. You depend on the issuer to perform or you suffer a loss. Physical, tangible gold and silver on the other hand are counter party to no one. They are items you can hold in your hand, stick in your pocket, throw in your trunk and take off. A stock can grow nicely or conversely it can go to zero. Tangible, physical gold and silver have never gone to zero – and never will. It is best to have both in your portfolio – physical metals and appropriate stocks, ETFs etc.
In Part 5 of our 6 part series “The 6 Ways to Own Gold and Silver!” I will examine Buying and Storing Precious Metals in Banks and Depositories
Action to take now: Continue to accumulate cautiously, with a weighting to silver over gold. Accumulate silver on a 2 to 1 ratio to gold. If the market declines, add to your position. If you do not yet have a position, begin by buying silver in the most effective form possible. Call us for details.
What to buy now: There are tremendous values in silver at present depending on the form you choose. In gold, there are very good values in British Sovereign fractional coins, 1-oz bars and Austrian 100 Corona coins. Call for pricing. For a limited time, most gold and silver in quantity are shipped Fed Ex with 1-week or less turn around.
