Financial Health and Wealth Advice - Physical Gold IRA Vs. Gold ETF

Physical Gold IRA Vs. Gold ETF

Why Choose a Physical Gold IRA Over Investing in a Gold ETF?

People often ask, “Why should I create a physical gold IRA?  Wouldn’t it be a lot easier just to invest in gold ETFs using my existing IRA?“  Well, yes, it would be easier, but would it be wiser?

Before we get to that discussion, for those of you that may not be familiar with all the terms, ETF stands for “exchange traded fund.”  ETFs are similar to mutual funds, but they have shares that are traded on the stock exchanges.  For purposes of this article, the ETF under discussion is GLD, the largest and best known gold ETF.

In this article, we’re going to examine the “fine print” from the GLD Prospectus and reveal some startling facts about gold ETFs that most investors (maybe even you) don’t know.  This information could change your thinking entirely about gold ETFs.  Wall Street loves ETFs, but are they really good for you?

A Share Is Not a Share

Most investors seem to assume that when they buy “shares” in the ETF, GLD in this case, they become a shareholder just as if they bought shares of Ford Motor Company or some other business corporation.

To make matters worse, some investors even assume that by purchasing GLD shares they own a share of GLD’s gold. Be careful with making assumptions like that.

Even though they are referred to as “shares,” GLD shares are not “shares” in the same sense that most investors  understand the term.

SPDR Gold Trust - Price 2012-2017GLD is a trust, not a conventional business corporation.  Legally, corporations and trusts are very different and play by different rules, both as to how they are treated for income tax purposes and as to how they are required to treat their “shareholders.”

Here’s what GLD itself says in its Prospectus (hey, somebody has to read those things, so I took one for the team:

The Shares do not represent a traditional investment and you should not view them as similar to “shares” of a corporation operating a business enterprise with management and a board of directors. As a Shareholder, you do not have the statutory rights normally associated with the ownership of shares of a corporation, . . . . 

So, what you own are shares in a trust, subject to the terms of a trust agreement, not shares of a corporation in which you are entitled to vote the number of shares you own to elect a board of directors, or in which you have the protections afforded to stockholders of a corporation.

Where’s the Beef, Uh, Gold?

Let’s dig a little deeper into the Prospectus for GLD:

The amount of gold represented by the Shares will continue to be reduced during the life of the Trust due to the sales of gold necessary to pay the Trust’s expenses irrespective of whether the trading price of the Shares rises or falls in response to changes in the price of gold.

So, it looks like if you own “shares” of GLD the amount of gold backing up your shares is continuously reduced!

But hold on a minute. Isn’t the main reason investors buy GLD in the first place is to increase gold investments in their portfolios?  Are you beginning to understand why so many precious metals advisers recommend physical gold in a segregated account over Gold ETFs like GLD?

Can ETF Shares Be Redeemed for Gold?

We’re not finished.  Some investors in precious metals ETFs are operating under the mistaken belief that they, by owning shares in the ETF, have a claim on the ETF’s gold.

Wrong!  When it comes to the average investor redeeming his or her shares, there is basically one option – cash, not gold, silver or any other precious metal.

Quoting again from the GLD Prospectus:

The Trust creates and redeems the Shares from time to time, but only in one or more Baskets (a Basket equals a block of 100,000 Shares).

GLD shares are selling for around $129 per share as of August, 2013.  If my math is correct, that would mean you would need to have an investment of $12,900,000 to redeem a single Basket of GLD for physical gold.

Even then, there are other restrictions on redemption for physical gold, but you get the point.  As a shareholder in a gold ETF, YOU DON’T OWN ANY GOLD! (Sorry for shouting)