The dangers of ETF gold

People who are intent on buying gold may consider an exchange-traded fund (ETF) as an option, however this method can be fraught with dangers.

The 2004 launch of the SPDR Gold Trust ETF, which operates under the ticker symbol GLD, allowed investors to purchase the yellow metal without possessing bullion bars or coins that needed to be stored.

Instead, the GLD is a trust that seeks to reflect gold bullion price performance by issuing shares backed by physical holdings of the precious metal. The bars are held at HSBC’s vault in London.

There are a number of gold ETFs in the world, but GLD is the largest. In fact, it is the second-largest global ETF, including those outside of the gold and silver markets.

However, there are various issues that make ETF gold less preferable than physically owning the precious metal.

Some ETFs do not allow redemption: The GLD is well known for not allowing you to redeem your gold. This means it is not possible for regular investors to take possession of bullion bars should they desire.

Banks are secretive about their holdings: HSBC, GLD’s custodian, is particularly secretive about the gold in its vault.

CNBC’s Bob Pisani was allowed to visit the vault, but had to give up his mobile phone before being allowed entry. He was also taken to an unspecified location in a van with blacked-out windows.

ETFs are not a safe haven investment: Physical gold is considered a safe haven investment because it always has value as a commodity and operates outside of typical financial markets.

ETFs operate within those markets, meaning they are at risk to the same geopolitical tensions and problems. In the event of a market collapse or the insolvency of the custodian, paper gold could become worthless overnight.

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