Gold ETF Illusions

According to the World Gold Council, global gold-backed ETFs added 298 tonnes. Total ETF holdings amounted to 3,296 tonnes, representing US$179 billion. The largest ETF is SPDR Gold Shares (GLD) with 1,048 tonnes.

When you buy a physical asset, such as real estate, a car or a boat, a great deal of effort is made to ensure that legal title to the asset is transferred to the buyer.

Surprisingly, when it comes to acquiring gold, investors tend to ignore these basic fundamentals and instead focus on the storage costs and management fees; they don’t give a second thought to actual legal ownership. Many gold transactions, such as futures contracts, certificates, and ETFs, are nothing more than paper proxies or derivatives of gold.

They do not represent legal ownership of gold. ETFs have significant counterparty risk on many levels as it is marketed as a ‘Tracking Vehicle’. Authorized Participant (AP), the trustee or others, may default or fail to uphold their part of the agreement.

ETF investors don’t own any bullion. The bullion is leased from central banks by bullion banks acting as APs. Title to the asset remains the property of the lessor. However, if a bullion bank becomes insolvent, the central bank lessor would demand the return of its bullion from the ETF.