Gold & Silver ETFs

ETFs

Many people do not understand the differences between buying physical gold, silver or other precious metals and buying paper metals products, such as a gold or silver-based ETF. Here we will look at the differences specifically between owning physical metals and owning shares of the gold based ETF GLD or the silver based ETF SLV.

What Exactly is GLD?

GLD is the symbol for the SPDR Gold Shares exchange traded fund, or ETF. This gold based exchange traded fund began trading on November 18th, 2004. GLD currently has about $33.12 billion in assets. The fund is listed on the New York Stock Exchange Arca. This ETF was designed and intended to allow investors to participate in the gold market without having to take actual delivery of the gold or deal with other potential barriers such as custody or transaction costs.

In other words, by purchasing shares of GLD, one could potentially profit from a rising gold price and one could potentially lose money from a falling gold price. This is because shares of GLD are designed to try and closely mimic the price of gold minus the fund’s fees and expenses. Each share of GLD represents a fractional, undivided ownership interest in the trust. GLD owns only gold bullion and sometimes cash. In addition to potentially allowing more investors to participate in the gold market, GLD may also provide an investment vehicle in gold that can be used by various funds and pensions that do not have the capability to invest in physical bullion or derivatives of physical bullion.

What Exactly is SLV?

SLV is the symbol for the iShares Silver Trust ETF. This ETF began trading in April, 2006, and is listed on the New York Stock Exchange Arca. SLV was designed and intended to give investors a cost-efficient and simple way to gain access to the silver market without having to take delivery or worry about storage and other issues associated with purchasing physical silver. SLV currently has about $6.5 billion in net assets.

Like the gold ETF GLD, if one buys shares of SLV then one may potentially profit from a rising silver price, while one may stand to lose money if silver prices fall. The fund does not move exactly like silver, however, as the fund is designed to mimic the price of silver minus fees and expenses. Each share owned by an investor represents a fractional beneficial ownership in the trust. SLV, like GLD, may potentially provide a vehicle to invest in silver for entities or organizations that cannot invest in the physical metal or other types of physical silver investments. 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 does not equate to owning actual physical gold. This is very important for potential investors to understand. Although the fund is based on gold and holds gold and/or cash as its only assets, share holders are not guaranteed to receive physical gold in exchange for their shares. That being said, one can exchange their shares for baskets of gold but it must be done through the fund’s trustee which is the Bank of New York Mellon.

The Bank of New York Mellon does not, however, deal directly with the public. In order for a shareholder to take delivery of the actual physical gold, he or she must be an authorized participant and deal in 100,000 share blocks. In addition, one looking to take delivery must make arrangements with their broker. That being said, a 100,000 share block at current prices equals a monetary value of approximately $12,572,000. Needless to say, this may be out of the reach of the vast majority of investors. The bottom line is that while taking delivery is possible for some, for most it is out of reach financially and also involves a process. In terms of SLV, a similar issue is presented. In order to try to redeem baskets of shares in SLV, one must be an authorized participant and deal in 50,000 share blocks. Once again, the large amount of shares required to take delivery may make it prohibitive for most investors.

Where Is Gold GLD and Silver SLV Held?

GLD holds its bullion in the form of 400 ounce London good delivery bars. These bars are held in the HSBC USA, NA Bank vault in London. SLV holds it silver in the form of London good delivery bars and these bars are stored in England, New York and other locations that may be authorized.

Counter-party Risk

Because GLD is a paper asset that is backed up by gold, it does involve some degree of counterparty risk. These risks could entail such issues as accounting problems, or liquidity issues. The same potential for counterparty risk exists with SLV, as well.

Owning shares of gold-based ETF like GLD is not the same as owning physical gold bullion that you can touch and feel. The difficulty surrounding the delivery process of GLD bullion is obviously an issue worth considering. In a potential time of economic or geopolitical crises, one may not be able to exchange shares of GLD as they would physical bullion.

Although the fund is designed to try and closely mimic the price of gold, there are also fees associated with investing in such a vehicle. That being said, owning physical bullion has fees associated with it, as well. One can compare the fees, however, and also weigh whether or not actually taking custody of gold is important to them. It is important for one to understand, however, that owning physical gold is not the same as owning shares of a paper gold product or derivative. The same considerations could be taken into account regarding physical silver investments versus investments made in SLV.

While this list is by no means extensive, here are just a few of the potential pros and cons of GLD, SLV or other gold or silver based ETF products:

GLD/SLV Pros

  • Provides easy access to gold or silver markets
  • Easy to monitor day-to-day activity
  • Small minimum investment
  • GLD/SLV fees may be lower than costs associated with storage and protection of physical bullion

GLD/SLV Cons

  • Ownership in GLD/SLV does not equate to owning physical gold or physical silver
  • GLD/SLV have certain potential counterparty risks
  • Taking delivery of physical gold or silver bullion is out of reach for most investors
  • Potential for liquidity issues
  • In an economic or geopolitical crises, shares may not be exchangeable like physical metals

Physical Gold & Silver Pros

  • You own the gold or silver. It is bought and paid for. You can touch and feel it.
  • Physical gold or silver ownership does not carry with it the potential counterparty risks of paper gold or silver products
  • Gold and silver are recognized all over the world and can be exchanged anywhere in the world
  • Physical gold and silver can potentially provide some degree of hedge against economic turmoil or geopolitical risks

Physical Gold & Silver Cons

  • Physical gold or silver may have more costs associated with it, such as storage and insurance fees
  • One must pay dealer premiums and/or markups
  • One will usually sell metal at spot price or below

While this list is by no means extensive, the fact is that owning gold, silver or other precious metals is very different than owning paper investments in these products. Gold, silver and other precious metals have been considered a store of value for thousands of years, and this may not change anytime soon. The ease with which gold or silver may be exchanged or transacted makes them very attractive. In addition, unlike GLD, SLV or other paper investment vehicles, physical metals are recognized all over the globe regardless of location, language or other potential barriers. For this reason, physical metals can potentially provide a level of comfort that paper metals products cannot.

All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.