Is GLD Really As Good As Gold?

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Since all the center banks have found the easiest yet the most powerful weapon to make the economy thrive – Money Printing, the Gold will be shinning. I’m seriously considering owning some gold at least for my children because in the end the paper money would worth nothing.

I know there’re 2 ways to own gold:

  1. Buying gold bars directly from gold dealers, say BullionVault.
  2. Invest in an ETF called GLD.

The question is: Is GLD really as good as Gold? The following lines are from Forbes, the original post is here:

GLD is a trust, sponsored by the World Gold Council (through World Gold Trust Services), which oversees the performance of the trustee, which is Bank of New York Mellon (note Hutchins works for the trustee).

The trust seeks to reflect the price performance of gold bullion by holding gold bars and issuing shares backed by their holdings of physical metal.  The gold bars are held in HSBC’s vault in London, and shares are sold in baskets of 100,000.  The ETF is marketed by State Street.  Where most investors are confused about GLD, though, is about redemption.

Even though GLD is “physically backed,” ordinary investors can’t just go to London and redeem their bullion.  Only “authorized participants” are allowed to create or redeem shares.  Authorized participants are registered broker-dealers or other securities market participants which have entered into agreements with the trustee and sponsor (these include major Wall Street names like Citi, Goldman Sachs, Morgan Stanley, JPMorgan Chase, and Merrill Lynch-Bank of America, among others), allowing them to  deposit either gold or shares in exchange for the other at unallocated accounts until the operation is completed.

Regular shareholders have no rights of redemption and the gold is not required to be insured by the Trust, which is not liable for loss, damage, theft, nor fraud.  Shares are bought in the open market, only after Authorized Participants decide to place or sell them.  Therefore a retail investors doesn’t actually “own” gold, but an asset that is backed by gold and represents a certain quantity of the yellow metal.

So my understanding is:

  1. Although GLD is physically backed but it might not be enough, you never know. It kind of reminds me those genius derivatives invented by Wall Street that nobody understands and yet claimed to be secure and later might or might not cause some troubles that happened in year 2008.
  2. Those physically backed Gold is not insured.
  3. GLD helped make the market more democratic, to a certain extent, but also injected liquidity, thus fueling further price volatility on Gold itself.

So the conclusion is, GLD is a cheap way to play with gold but is clearly not the same as owning physical gold. Just like the subprime mortgage, when it is thriving, there’s no problem but when something terrible happens, who knows what would happen on GLD, therefore at least it’s not a good idea for the long-term investment.

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