Gold ETF Holdings Surge... But Do They Actually Hold Gold? / Commodities / Gold & Silver 2019
Gold-linked exchange-traded products are growing in popularitywith investors. Assets held by gold ETFs have grown 38% globally in 2019.
In October, according to the World Gold Council, gold ETFsattracted $1.9 billion in net inflows to reach a new record high total goldholding of 2,900 tonnes – at least on paper.
There is good reason to be skeptical of whether all these “gold”vehicles actually hold physical metal sufficient to back their marketcapitalizations on a 1:1 basis. Some of them very well might; others almostcertainly don’t.
In fact, many of these gold instruments hold futures contractsand other financial derivative products that merely “track” the gold price.
The biggest of them all – SPDR Gold Shares (NYSE:GLD) – purportsto have 100% backing of its $42 billion market capitalization in physicalbullion. But it’s practically impossible to achieve around the clock since thefund’s assets are a moving target.
As an open-ended fund, GLD doesn’t hold a fixed quantity ofgold. A close inspection of its prospectus reveals that it relies on layers offinancial intermediaries to create shares and manage its gold inflows andoutflows.
That creates a tremendous amount of counterparty risk, includingthe risk that some of the gold claimed in vaults by GLD may be rehypothecated,or simultaneously owned by another party. Rehypothication is defined byInvestopedia as “the practice by banks and brokers of using, for their ownpurposes, assets that have been posted as collateral by their clients.”
According to Chris Powell of the Gold Anti-Trust ActionCommittee, “The custodian of the vault holding GLD's gold is the investmentbank HSBC, perhaps the biggest short in the goldmarket… the bank is the beneficiary of a new New York CommoditiesExchange rule apparently allowing the bank to inject more ‘paper gold’ into thefutures market.”
Banking and gold don’t go well together – not for goldinvestors, anyway. The whole point of owning a hard asset is to have wealthoutside of the financial system!
Chris Powell continues, “GLD itself facilitates the shorting ofreal metal through the borrowing and conversion to metal of its shares and thesale or lease of that metal by enormously well-funded brokers executing centralbank market-rigging policy.”
It’s clear that a great bulk of GLD owners aren’t payingparticularly close attention to what they’re investing in. If they were, whythey would prefer GLD (which levies annual expenses of 0.40%) over lower-costrivals that do the same thing?
Why would they prefer GLD over more secure closed-end funds thathold a fixed amount of metal? Why would they prefer cash-out-only GLD overinstruments that allow for physical redemption above certain quantities?
The only reason seems to be that GLD is always presented as theWall Street stand-in for gold on CNBC and in mainstream financial publications.
Are Rising ETF Inflows a Bullish Signal for Gold?
Despite all of the foregoing drawbacks to precious metals ETFs,their rise isn’t necessarily a bad sign for the physical market. More peopleare wanting exposure to gold and silver. That’s good news for bulls.
It’s easier for billionaires and institutional investors such ashedge funds to move millions of dollars into gold via an ETF rather thanthrough the purchase of gold coins. Some “smart money” may be moving into goldvia this route.
Owning gold indirectly through financial instruments obviouslyisn’t the smartest strategy for obtaining true diversification out of financialassets. But people who have made fortunes in financial markets tend to perceiveit as the only game in town.
And that’s the way Wall Street brokers and analysts tend topitch precious metals investing to the public. If it doesn’t trade like astock, it doesn’t even register.
That so much demand is being diverted into Wall Street productsinstead of bullion products has certainly suppressed buying of bullion to someextent. That, in turn, may be working to keep a lid on spot prices as well.
The opportunity is that tens of billions of dollars parked in goldand silver derivatives meant to represent precious metals may createsomething of a force majeure on one or more of the bullion banks – or thefutures market itself. If one link in the system fails or is exposed asfraudulent, then confidence could collapse in all forms of paper gold.
Paper/IOU gold may be “convenient” but it is inherentlyuntrustworthy as compared to the real thing. When fear grips markets,convenience considerations go out the window, and wealth preservation becomesparamount.
When the next financial crisis comes, physical gold can beexpected to trump paper gold.
Stefan Gleason isPresident of Money Metals Exchange, the national precious metals company named 2015"Dealer of the Year" in the United States by an independent globalratings group. A graduate of the University of Florida, Gleason is a seasonedbusiness leader, investor, political strategist, and grassroots activist.Gleason has frequently appeared on national television networks such as CNN, FoxNews,and CNBC, and his writings have appeared in hundreds of publications such asthe Wall Street Journal, Detroit News, Washington Times, and National Review.
© 2019 Stefan Gleason - All Rights Reserved
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