Wednesday, June 3, 2009

Think Your Gold ETF Really Invests In Gold? Better Check The Small Print

Several analysts are bullish on gold right for reasons such as the threat of inflation or potential weakening of the dollar. However if you want to invest in gold ETFs be careful. Not all ETFs are created equal. According to Toni Straka from The Prudent Investor some ETFs hold paper contracts and claim no liability of the third party's management of the gold.

Does your favorite precious metals exchanged traded fund (ETF) or exchange traded commodity (ETC) really invest in bullion all time? Or does it rely on paper contracts where a third party poses a counter party risk to a varying degree? Not everything marketed as a way to safely invest in precious metals truly shines under the spotlight.

To my knowledge there is only one group of precious metals ETFs, managed by Swiss Zuercher Kantonalbank (ZKB) - sorry, no English language information found - that always holds the 4 fund's funds in 100% gold, silver, platinum or palladium. This limits the only risk to the size of cash holdings that are unavoidable for short periods when the ETFs adjusts bullion holdings during trading hours.

I have checked a few other liquid European and US ETFs, but this appears to be the only safe way to own allocated gold besides holding it physically. Within the European Union there appear to be no restrictions to buy/hold/sell these ETFs, others please check local regulations.










GRAPH: Read from this gold chart whatever technical indicators you prefer. The fundamentals have never been stronger for a long gold strategy. Chart courtesy of kitco.com

Read more about investing in gold here at wikinvest.

Most, if not all other precious metals ETF/ETC come with some sort of a counter party risk.

Checking the prospectus (PDF)of global heavyweight SPDR , risk factors beginning on page 10 give room to "don't blame me, blame the next one in the food chain" finger-pointing games like this quote from page 13,

If The Trust's gold bars are 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.


Check out the 4 pages of risk factors yourself and find more quotes hinting at a counter party risk. SPDR may also accept non-standard gold bars without checking their genuineness by its management.

Click here for a SPDR chart who reported record holdings of 1,124 tonnes or 36,460,190 ounces as of today. But it is not 100% gold according to the fine print.

A price below spot gold stems from expenses paid for after selling some gold.
Basically the same applies to Europe's popular XETRA gold ETC, traded in Frankfurt. Check out the prospectus starting at this disclaimer page. Always remember only to enter security classes when you fully understand them. Xetra gold is basically a permanent zero bond without a coupon, covered by gold and claims on gold.

As ZKB's precious metals fulfill my requirements I have not looked further. If you come across more ETF/ETCs that truly hold the gold/silver/platinum/palladium themselves down in the vault, please let me know in comments.

DISCLAIMER: I am in no way affiliated with ZKB and I cannot confirm the rumor that ZKB headquarters is sinking under the weight of its ETF holdings in its vaults. Long gold positions.

This article has been reposted from The Prudent Investor. The full post can also be viewed on
The Prudent Investor.

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