What Happened to the Gold?
OK, so you’re thinking that about wraps it up. How could the outlook for a gold ETF investment get any worse? Back to the GLD Prospectus we go. As boring as a Prospectus can be, you have to admit that this is getting kind of interesting:
The Trust’s gold may be subject to loss, damage, theft or restriction on access.
There is a risk that some or all of the Trust’s gold bars held by the Custodian or any sub custodian on behalf of the Trust could be lost, damaged or stolen. Access to the Trust’s gold bars could also be restricted by natural events (such as an earthquake) or human actions (such as a terrorist attack). The Trust does not insure its gold. The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody. The Trust is not a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage. Therefore, Shareholders cannot be assured that the Custodian will maintain adequate insurance or any insurance with respect to the gold held by the Custodian on behalf of the Trust.
In addition, the Custodian and the Trustee do not require any direct or indirect subcustodians to be insured or bonded with respect to their custodial activities or in respect of the gold held by them on behalf of the Trust. Consequently, a loss may be suffered with respect to the Trust’s gold which is not covered by insurance and for which no person is liable in damages.
Did I read that right? The Trustee does not insure GLD’s gold, and the Custodian and any sub custodians may or may not have insurance! What? How can that be? And, the companies handling, accounting for and storing the gold are not even bonded? As John McEnroe, the tennis star, used to say, “you cannot be serious!”
The Custodian is the firm engaged to store GLD’s gold. That Custodian can, in turn, engage sub custodians. So, the gold is farmed out to a company or companies who are not required to insure the gold and whose employees are not bonded. What’s wrong with this picture?
Need we continue?
Whose Gold Is It?
OK, I can’t resist. One last thing. Check this out, again from the GLD Prospectus:
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 plain English, that means that the gold can be deposited into an unallocated account and mixed with the Custodian’s own gold, or even any Authorized Participant’s gold. So why is that a big deal?
It’s a big deal because that means the ETF’s gold can be mixed with the Custodian’s gold or with any Authorized Participant’s gold and thus become impossible to identify as the gold belonging to the ETF. If the Custodian or an Authorized Participant gets into financial trouble, doesn’t pay its taxes or files bankruptcy, the ETF is going to have to get in line with all the other creditors, and probably won’t recover a significant part of its gold.
Summary
In the beginning of this article the question was asked, “wouldn’t it be a lot easier to invest in a gold ETF?“ Technically, the answer is yes, but the caveat is that it would also be a lot easier for you to lose your investment. Remember that part about no insurance and no bonding, theft of the gold and terrorist attacks?
Make your own decisions, but at least now you are better informed about how precious metals ETFs really work. Even if the gold belonging to the ETF is not lost or stolen, by the ETF’s own Prospectus the amount of gold represented by the Shares will continue to be reduced during the life of the Trust.
And, when it comes time to cash out your shares, don’t even think about asking for physical gold unless you have an investment of over $12 million. Nope, when you cash out and assuming the shares still have any value, they are going to pay you in “Bernanke Bucks,” otherwise known as fiat currency.
The second question posed at the outset was, “would it be wiser to invest in a gold ETF?“ Having read this article, I’ll leave it to you to make your own assessment of wisdom.
Thanks for reading.
