A few weeks ago, Nick Barisheff, CEO of BMG Group, and I had a conversation on the major assets classes for 2020. The conversation covered real estate, stocks, bonds, and precious metals.
Nick mentioned he was doing a new research piece on the dangers of owning gold in an ETF such as the GLD, so we decided to touch base with him again to discuss his research.
Most retail investors will probably purchase GLD for gold, and SLV for silver, instead of buying real physical metal. These precious metals ETFs are supposed proxies for the gold and silver price, and offer traders exposure to the metal price without the burdens of securing metals.
However, as Nick points out, owning GLD and SLV ETFs are fraught with risks that most investors are unaware of, and may be adversely affecting the spot prices of the metals in the markets due to overcounting of metals supply.
Some of the main points that Nick goes into detail include:
General Points About ETF Ownership Risks
ETFs are not covered under the same regulations as Investment Company structures such as mutual funds; therefore, they offer less legal protection to investors.
ETF is a “tracking vehicle”; however, there is no ownership of the assets such as gold or silver.
The assets are borrowed into the ETF, and are not purchased with outright title. In a case of insolvency, the ETF share participant has no claim to the borrowed assets and therefore no asset of tangible value.
Brokers make their money from the commission on the sale on an interest-free loan of assets.
Specifically for GLD and SLV
Specifically for precious metal ETFs GLD and SLV, the assets are borrowed/leased from the central banks and not purchased with clear title for ETF shareholders.
There is no transfer of title in the Authorized Participant Agreement for these funds.
Where an Authorized Participant goes insolvent, a fight would ensue between the ETF share owner and the lessor as to ownership of the actual metal.
How GLD and SLV could pose similar risks to investors as from the bankruptcy of MF Global in 2011.
This investment scheme provides phantom supply for gold and silver which masks real demand pressure on the price in the open market, where gold and silver price should be multiples of current spot price.
Title transfer to bullion in the gold and silver markets in these types of derivative market investments is not clearly supported, as it is in mature investment sectors such as real estate and other physical assets.