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Honored Advisor

The Big Lie Behind the Gold ETF Boom


Written by Damon Geller

Gold is not something that no one knows about anymore.  Having tripled in value since 2001 with an average growth rate of around 15% per year, gold’s return has certainly been worthy of notice.  Yet despite breaking through all-time highs, relatively few people are actually buying it.  Not physically anyway.  Instead, for  those who have started to consider gold a viable addition to today’s portfolio, one of the most popular places to “get some exposure to gold" has been the gold ETF, GLD.  What most people don't realize, however, is that GLD is riddled with counter-party risk and doesn't offer most of the wealth protecting benefits of physical gold.

GLD was invented in late 2004.  Currently, the one ETF trades around 12 million shares daily (that’s $235 million) and is its share price is supposed to represent 1/10 of an ounce of bullion (although it seems to trail behind by about $50/oz.).  There are also other metal ETFs as well, like SLV (silver), PPLT (platinum), PALL (palladium) and even some nifty ETFs that represent a collection of metals like GLTR.

Huge ETF Risks

Owning the GLD ETF is not the same as buying gold; far from it.  Yet when an investor calls their financial advisor and asks about gold, he or she is usually steered into the GLD ETF.   That makes perfect sense to bankers and financial advisors, because if you were to buy real gold you would be removing liquidity from “the system," and bankers don't like that.    Bankers and financial advisors have a vested interest in keeping as much liquidity in the system as possible.  A study of fractional-banking and a simple look at the Fed's balance sheet will illustrate that.  There have been TRILLIONS in printed money injected into the insolvent banking system to keep it on life support.  Much of it coming from policies that put the taxpayer (and their children) on the hook for any hiccups and/or inflation risks, such as oil and gasoline.

While owning an ETF is a decent short-term trading tool, it should not be considered a “hedge” to a paper-based portfolio.  Hedging yourself means spreading around counter-party risk as well as diversifying asset classes.  Sure, it may sound great when your adviser says, “Don’t worry, you’re diversified with stocks, bonds, REITS and the ETF GLD.”  But the reality is, everything he just listed is a promise on a piece of paper that someone will give you something that is supposed to represent “money” when you ask for it.  They're all riddled with counter-party risk.  Remember Bear Sterns, Enron, and “MF Global”?  On the other hand, when you own real gold, you already have the money – the only unprintable currency on earth.  Real savings, not debt-based promises.  Compare that to the COMEX, which trades on paper many times the physical gold available.  If the COMEX were to default, GLD could fall while the price to acquire a real ounce of gold could be rising fast.

Furthermore, anyone who is considering an investment in gold – but is thinking GLD may be the way to go – needs to read the prospectus.  The GLD fine print is littered with county-party risk.  Page 10 states “If the Trust’s gold is lost, damaged, stolen or destroyed under circumstances rendering a party liable to the Trust, the responsible party may not have the financial resources sufficient to satisfy the Trust’s claim.”  On page 9:  “The Trust does not insure its gold.”  Further on page 12: “Gold held in the Trust’s unallocated gold account and any Authorized Participant’s unallocated gold account will not be segregated from the Custodian’s assets.  If the Custodian becomes insolvent, its assets may not be adequate to satisfy a claim by the Trust or any Authorized Participant.  In addition, in the event of the Custodian’s insolvency, there may be a delay and costs incurred in identifying the bullion held in the Trust’s allocated gold account.”  Read it, and you wouldn’t invest $5 in GLD.  Seriously.

The Hidden Agenda of ETFs

The fact of the matter is, GLD is a banker-invented profit instrument which acts as a gold-price suppression tool.  I say this for very good reason.  Think about all the folks who own GLD mid- to long-term as a hedge.  In other words, they are long GLD.  Imagine if they were all putting the same amount of money into real gold instead of GLD.  How much higher would the price of gold be if GLD (or any metal ETF) didn’t exist?   What would the price of gold be if the bankers had not hidden the money in a black box called GLD, but instead all that money was chasing real gold?  We all know gold would be much higher.  So GLD acts as a gold-price suppression tool designed to benefit the bankers and financial advisors.  And what happens when average investors inevitably lose faith in GLD and move their money into real gold?

Well, that's exactly what's starting to happen.  Every day we're getting calls from folks like you who would like to know how to convert those ETF holdings to real physical metals.  In this policy-driven market, you want your gold physically where YOU can maintain control over it for better protection from a financial-system meltdown.  So to really take advantage of the “wealth preservation” or “protection” that the individual investor is looking for, buying real gold coins is far better than ETFs.  Simply put, owning physical gold offers greater safety, a better hedge and less counter-party risk than ETFs.

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Re: The Big Lie Behind the Gold ETF Boom

Neither are very appealing with gold down $92/oz today. OR I guess maybe it is appealing if you aren't long.


Incredible whipsaw in silver the last two days- up almost $2 yesterday, currently down around $2.50.



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