A few weeks ago, Nick Barisheff, CEO BMG Group, and I had a conversation on the major assets classes for 2020. The conversation covered real estate, stocks, bonds, and precious metals.
Nick mentioned he was doing a new research piece on the dangers of owning gold in an ETF such as the GLD, so we decided to touch base with him again to discuss his research.
Most retail investors will probably purchase the GLD for gold, and SLV for silver, instead of buying real physical metal. These precious metals ETF’s are supposed proxies for the gold and silver price, and offer traders exposure to the metal price without the burdens of securing metals.
However, as Nick points out, owning GLD and SLV ETFs are fraught with risks that most investors are unaware of, and may be adversely affecting the spot prices of the metals in the markets due to over-counting of metals supply.
Some of the main points that Nick goes into detail include:
ETFs are not covered under the same regulations as Investment Company structures such as mutual funds, therefore they offer less legal protections to investors;
ETF is a “tracking vehicle”; however, there is no ownership of the assets such as gold or silver;
The assets are borrowed into the ETF, and are not purchased with outright title. In a case of insolvency, the ETF share participant has no claim to the borrowed assets and therefore no asset of tangible value;
Brokers make their money from the commission on the sale on an interest free loan of assets;
Specifically for precious metal ETFs GLD and SLV, the assets are borrowed/leased from the central banks and not purchased with clear title for ETF share holders;
There is no transfer of title in the Authorized Participant Agreement for these funds;
Where an Authorized Participant goes insolvent, a fight would ensure between the ETF share owner and the lessor as to ownership of the actual metal;
How GLD and SLV could pose similar risks to investors as from the bankruptcy of MF Global in 2011;
This investment scheme provides phantom supply for gold and silver which masks real demand pressure on the price in the open market, where gold and silver price should be multiples of current spot price;
Title transfer to bullion in the gold and silver markets in these types of derivative market investments are not clearly supported, as they are in mature investment sectors such as real estate and other physical assets.
I will provide a key quote from Nick’s article to frame the following interview [emphasis mine]:
According to a Solari Special Report by Catherine Austin Fitts, president of Solari, Inc., the publisher of The Solari Report and managing member of Solari Investment Advisory Services, LLC, on the GLD and SLV, the term “exchange-traded fund” is not a precise legal term defined by statute, as is an “Investment Company,” of which mutual funds are a subcategory. Both hedge funds and ETFs, at least under current law, are investment vehicles created for the express purpose of avoiding some or all of the regulation under securities laws that apply to investment companies and traditional stocks. ETF investors have limited voting power, including the ability to remove management. The Trustee’s and Custodian’s limited responsibilities are set out at the creation of the trust and execution of the custodial agreement, with no mechanism to change those responsibilities in the event of change, and no direct accountability to investors.