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Category: Bullion Bulletin

Bullion Bulletin: ETFs and the ownership of gold – read the fine print

Gold exchange traded funds (ETFs) in the first quarter of 2022 had net inflows of 269 tonnes, the highest quarterly net inflow since Q3 2020. The tota...

24 April 2022

Gary Mead

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Gold exchange traded funds (ETFs) in the first quarter of 2022 had net inflows of 269 tonnes, the highest quarterly net inflow since Q3 2020. The total assets under management in these ETFs now stands at 3,836 tonnes, or $240 billion (based on the London Bullion Market Association’s afternoon gold price of 28 February), the highest tonnage level since November 2020. The underlying explanations are that rapidly rising inflation and unexpected geopolitical risks more than offset the drag from higher nominal rates, and the promise of yet higher interest rates ahead.

ETFs enable the smaller investor to have exposure to the gold price, and the costs of the storage and insurance of the gold are wrapped into the fund’s ongoing fees. ETFs that track the price of gold have a number of things to be noted in their favour but the issue of ownership is a little opaque.

According to materials submitted to the US Securities and Exchange Commission (SEC) the gold in some ETFs is ‘allocated’. The SEC is responsible for protecting investors by enforcing US securities laws. But there is ‘allocated’…and then there is ‘allocated’. If the gold is ‘allocated’ then it is owned outright by an investor and stored in a professional bullion vault. If the metal is ‘unallocated’ then it remains the property of the bank or other intermediary and the person who has paid for the metal is essentially no more than a creditor of the bank. So it is vital to know what you have actually bought – which in the case of Glint is gold that is allocated directly to you. In the case of some gold ETFs the gold is “allocated to the Trustee”, but it is “not allocated to individual ETF holders”, which means “indirect ownership to ETF holders”. Because an ETF is exchange-traded, the names of ETF shareholders keep changing every day, which cannot be reflected on bullion every day.

Moreover, with ETFs there is ‘counter-party risk’, i.e. the possibility that the other party in an agreement (which in the case of an ETF is the fund) will default or fail to live up to their obligations. Given that one of gold’s primary benefits is being a financial asset that is not simultaneously somebody else’s liability, owning a gold ETF rather than gold via Glint is a poor substitute. When you invest in a gold ETF you in reality become a shareholder in the trust that manages the ETF, not a gold holder. So the price of gold could be soaring while the ETF is going bankrupt at the same time.

With Glint you have both immediate liquidity and direct allocated ownership of your gold; isn’t this a most sensible way to save gold?

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