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Gold Exchange Traded Funds May Have a Hidden Risk

 -- Published: Friday, 20 May 2016 | Print  | Disqus 

By Dr. Richard S. Appel

Gold Exchange Traded Funds ( ETFs) are among the American Public’s most popular methods to hold, trade or speculate in gold. They were first offered in the 1990’s. The largest, SPDR Gold Shares, began in 2004. The early ETFs encountered significant resistance because gold believers demanded physical possession of their gold. In this fashion they avoided worrying about the entity holding their gold assets. They were sufficiently concerned with the viability of the dollar or the advent of a financial crisis, without adding another layer of fear that they couldn’t get their gold if they wanted it. However, as time passed, and more unsophisticated Americans realized they needed the protection of gold, the early reticence to the gold ETFs was overcome.

Today, the public has embraced the gold ETFs. Anyone with a stock account can purchase or sell virtually any amount of the yellow metal in a matter of minutes. Commissions are low. Storage concerns and finding a coin or bullion dealer from which to buy or sell their gold, are things of the past.

SPDR Gold Shares alone holds over 27 million ounces of gold worth $35 billion. Their fees appear low at a 0.4% daily compounded rate, and their gold is held in trust in London by the venerable HSBC Bank Plc. The Bank of New York Mellon Asset Servicing, a division of the trusted Bank of New York Mellon, is the trustee. While they don’t claim to have insurance for the gold they hold in trust, this troubles me less than another potential far greater concern.

On April 5, 1933, President Franklin D Roosevelt issued Executive Order 6102 which prohibited gold ownership, and forced Americans to surrender their gold. That was during the depths of the Great Depression. The prior few years witnessed countless U.S. bank runs with numerous banks going bankrupt. People lined up before their banks in an effort to get the money they had deposited. Many were unsuccessful.

In early 1933, the banking condition reached crisis proportions. President Roosevelt declared a State of Emergency, and a Bank Holiday from March 6-11. This closed our nation’s banks and created widespread hardship, because business sharply declined and basic necessities quickly dried up.

The world is looking more and more like 1929! The European Union is facing numerous challenges from which it and the Euro might not survive. Their immigration problem is swelling and is placing great strain on the relations of the various countries. Major banks in Italy, Spain, Portugal, Greece and other nations are likely insolvent if sound banking practices were demanded and enforced. The Depression was arguably triggered by the failure of Credit-Anstalt of Austria, one of the world’s largest banks of the period.

The U.S. stock market has grown to an epic height and margin debt remains near record levels after peaking last year. Both of these conditions have often presaged major market peaks, such as the top of the 1929 Bull Market, which were followed by devastating Bear Markets. Despite the bailout of our major banks, many experts believe our banking system remains on tenuous footings. Any major shock could trigger a financial meltdown which could begin at home or abroad, and create similar great havoc as did the Depression.

If any of the fears that motivate people to purchase gold as insurance surface, I don’t think our government would hesitate to do whatever they deem necessary to mitigate the damage. From time immemorial, gold has been at the center of virtually all major monetary systems, including in the United States. I believe if the dollar’s credibility comes into question, they will bring gold back into ours if they think it will work. In this event, like in 1933, they would demand all the available gold, and the gold ETFs are the most obvious targets to easily acquire large quantities of it.

It is true that SPDR Gold Shares holds its gold outside of the U.S., which is likely the case with other gold ETFs. However, their custodian is a U.S. entity. If our government believed the collection of gold to be in the national interest, I am certain they would demand domestic trustees and citizens holding gold trust shares to obey the law. One way or another, I am confident that the government would prevail and take the gold. If our nation again confiscates gold, all U.S. citizens, corporations and other entities holding gold ETF shares risk losing the gold upon which they counted. They would be observing their fears unfolding before their eyes, but would have lost their golden insurance policy. In 1933, the government paid our citizens the current $20.67 an ounce for their gold. Shortly thereafter they raised the gold price to $35.

I believe the gold ETFs can be cautiously used for trading or speculation purposes. However, for those that own gold ETF shares with the belief that they truly own the eternal metal, I believe their premise should be rethought. Hopefully our worst fears will not be realized, but there are other methods to own gold that were exempt from seizure in 1933, that I plan to discuss in a future missive. “Forewarned is forearmed.” If you continue to hold gold ETFs for any other reason than as a trading or speculation vehicle, be vigilant.

Disclaimer: This article is written by Dr. Richard S. Appel, a rare coin broker and consultant for his company He is the former editor and publisher of Financial Insights. It is made available for informational purposes only. He makes every effort to obtain information from sources believed to be reliable and to present correct ideas and beliefs, but the accuracy and completeness of his work cannot be guaranteed. You should thoroughly research and consult with a professional investment advisor before making any investments based upon the contents of this or any of Dr. Appel’s commentaries. Use of any information contained herein is at the risk of the reader without responsibility on our part. Dr. Appel does not purport to offer personalized investment advice and is not a registered investment advisor. Copyright 2016 by Dr. Richard S. Appel. All rights are reserved. Parts of the above may be reproduced in context for inclusion in other publications if Dr. Appel’s name and company are also included for credit.



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