Gold and Silver Exchange Traded Funds
Many people do not fully understand how buying physical Gold, Silver or other precious metals differs from buying Precious Metals on paper, such as a Gold or Silver-based exchange-traded funds, commonly called ETFs. Here we will examine the differences between owning physical Gold and Silver and owning shares of the Gold-based ETF, GLD, or the Silver-based ETF, SLV.
What Exactly is GLD?
GLD is SPDR’s— Standard and Poor’s depositary receipt— the symbol for the Gold Shares exchange-traded fund, or ETF. This gold-based exchange-traded fund opened trading on November 18th, 2004 and currently has approximately $33.12 billion in assets. The fund is listed on the New York Stock Exchange Arca. This ETF was designed to give investors the opportunity to participate in the Gold market without having to take delivery of physical Gold or deal with other attendant issues such as custody or transaction costs.
Put simply, purchasing shares of GLD allows investors to get in on the potential profit of a rising Gold price, though one also assumes the risk of losing money from a falling gold price. This is because GLD shares are meant to mimic the price of Gold as closely as possible, minus the fees and expenses accrued by the fund. Each share of GLD represents a fractional ownership of the trust. GLD owns only gold bullion, though sometimes holds cash. In addition to letting more investors participate in the thrill of the Gold market, GLD can also provide a Gold investment product that funds and pensions can purchase when they do not have the latitude to invest in physical Precious Metals or their derivatives.
What Exactly is SLV?
The iShares Silver Trust ETF’s symbol is SLV. This ETF opened in April 2006 and is listed on the New York Stock Exchange Arca. SLV is meant to give investors a simple, cost-efficient way to access to the silver market without having to accept delivery of Physical Silver. SLV currently holds approximately $6.5 billion in net assets.
As with GLD, the Gold-based ETF, purchasing shares of SLV could potentially lead to financial gains from a rising silver price, though one could possibly suffer a loss if Silver prices fall. The fund is designed to mimic the price of Silver minus fees and expenses, so while it moves with the price of Silver, the fund does not trade at Silver Spot Price. Every share owned represents an investor’s fractional ownership of the trust. SLV, like GLD, may provide an investment vehicle for those interested in Silver investment but are unable to invest in physical Precious Metals. SLV currently holds over 325 million ounces of silver in its trust.
If I Own Shares of GLD or SLV, Do I actually Own Gold or Silver?
Owning shares of GLD is nothing like owning physical Gold. This is an extremely important point for potential investors to thoroughly understand. Although the fund is based on Gold or Silver and holds Precious Metals and/or cash as its only assets, shareholders are not guaranteed to receive physical Gold in exchange for their shares. Theoretically, one can go exchange their GLD shares for big bags of Gold coins, but it must be done through the fund’s trustee, Bank of New York Mellon.
Now, this is where it gets complicated. The Bank of New York Mellon is not really open to the public. In order for a person holding GLD shares to take delivery of actual physical Gold, the shareholder in question must be an authorized participant and be able to deal in 100,000-share blocks. A 100,000-share block at current market price is about $12,600,000. It goes without saying that this sum may be beyond the resources of everyday investors. The takeaway here is that while exchanging your shares for Physical Gold is technically possible, it is out of reach for most investors, financially speaking, and also involves a process that requires facilitation by a professional broker. SLV shares present the same issues. In order to try to redeem baskets of shares in SLV, one must be an authorized participant and deal in 50,000 share blocks. This is considerably smaller than the GLD standard, but it is still likely prohibitive for most investors.
Where Is Gold GLD and Silver SLV Held?
GLD holds its bullion in 400-ounce London good delivery bars. Visually, that is what you think of when you think of “bars of gold.” These bars are located in the HSBC USA, National Association Bank vault in London. SLV also holds its bullion in the form of London good delivery bars, but these bars are stored in not only in England but also in New York and other authorized locations. Remember that there will be a great deal more Silver by volume because of its lower cost as compared to Gold.
A counterparty, legally speaking, is an entity that may be exposed to financial risk. Because GLD is a paper asset backed by Gold, there is a degree of attendant counterparty risk. These risks include problems such issues as accounting or liquidity issues. SLV carries the same potential for counterparty risk.
Owning shares of a Gold-based ETF like GLD is not the same thing as owning Physical Gold. Physical Gold is an investment you can hold in your hand, and keep in your home should you wish. The near impossibility of taking delivery of Physical Gold based on GLD ETF shares is obviously an issue worth considering if what you want is to actually own Gold. If you worry about potential times of economic or geopolitical crises, you must consider that you may not be able to exchange shares of GLD as money, which you may be able to do with Physical Gold.
Although the fund is designed to mimic the Spot Price of Gold, there are fees associated with investing in an ETF. That being said, owning bullion bear associated costs, too. Compare the fees, and weigh whether or not the act of taking custody of Gold is important to you. It is important to understand how owning Physical Gold differs from owning shares of a Gold-based paper investment product. The same considerations all hold true for SLV.
Pros/Cons of ETFs
Though this is not a complete list, viewing this information point by point may help you to weigh the potential pros and cons of GLD, SLV or other Gold or Silver based ETF products versus the potential pros and cons of owning Physical Gold or Silver:
- Makes Gold or Silver markets accessible
- Easily monitor day-to-day activity
- Modest minimum investment
- ETF fees may be lower than the costs associated with storage/security of physical bullion
- Ownership in GLD/SLV is not the same as owning physical Gold or Silver
- GLD/SLV carry potential counterparty risks
- Taking delivery of physical Gold or Silver bullion is impossible for most investors
- Potential liquidity issues
- In an economic crisis, shares may not circulate as physical Metals might
Physical Gold & Silver Pros
- You own the tangible asset of Gold or Silver
- Physical Gold or Silver ownership does not carry the potential counterparty risks of paper gold or silver products
- Gold and Silver are recognized worldwide for their intrinsic value
- Physical Gold and Silver may possibly provide a hedge against economic collapse
Physical Gold & Silver Cons
- Physical Gold or Silver may have more attendant costs and responsibilities, such as storage and insurance fees
- One must pay dealer premiums and/or markups
- Privately-held Precious Metal generally sells at spot price or below
These are not the only considerations, but they may help you decide for yourself what your ideal investment product might be. It’s important to understand that owning Gold, Silver or other Precious Metals is very different from owning paper investments in these products—it’s the difference between the tangible and the theoretical. Gold, like all Precious Metals, has been prized for thousands of years. Mankind has always recognized Gold’s intrinsic value, and probably will forever. The worldwide liquidity of Gold and Silver is alluring. In contrast to GLD, SLV or other paper investment vehicles, Physical Precious Metals are recognized around the world, free from the barriers of language or location. For all these reasons, Physical Gold and Silver can provide investors with the comfort and security that eludes paper Precious Metals investment products.