Designing the Perfect Gold ETF
The recently-introduced Sprott Physical Gold Trust (PHYS) is getting a lot of attention from gold-oriented investors. My colleague Ron Rowland explained how PHYS is Not an ETF despite some superficial similarities. The conversation about PHYS often comes back to one central question: Can an investor be sure the gold represented by shares of the fund is really there?
The quick answer is “No.” The process of securitizing gold – as with any other asset – depends on the integrity and cooperation of numerous parties. The chain can fall apart at any point if someone is dishonest or incompetent. Assorted safeguards exist to reduce this possibility, but they are not foolproof. This applies not only with PHYS but also products like SPDR Gold Trust (GLD), iShares Comex Gold Trust (IAU), and ETFS Physical Swiss Gold Shares (SGOL).
That being the case, investors who demand assurance they really own physical gold stored in their name in a secure place should probably not buy any of these gold-related securities. All are nothing more than book entries and pieces of paper that claim to represent the ownership of gold. If you don’t trust whoever is making this claim, don’t do business with them. Buy a good safe and keep your gold at home.
Storing gold in your house isn’t risk-free either, of course. Burglary and robbery are always possible. You also won’t be able to buy and sell instantly, and your transaction costs will likely be higher than they are in the securities markets. It would be nice to have our cake and eat it too, but I don’t see how.
So I throw out a question to you: How do we square this circle? What do you want to see in an exchange-traded gold product? What could sponsors like Sprott, ETFS, iShares, or SPDR do to meet your needs?
Keep in mind there will always be trade-offs between expenses, liquidity, and security. The possibilities are also limited to what is legal. Maybe the law ought to be different – and would be different if guys like Ron Paul were in charge – but that’s a separate question. We have to play with the cards we are dealt. Add your ideas in the comments and maybe someone who can do something about it will pay attention.
Disclosure covering writer, editor, and publisher: Long GLD. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.
