Is a Gold Exchange-Traded Fund (ETF) right for you?
The answer depends on why you’re buying gold in the first place. An ETF allows you to buy and sell gold without physically touching or storing it. ETF funds are backed by gold, but there is probably less gold behind them than you might think. The principle is the same as the way banks operate - if they have $1mm on deposit from customers, they can lend a multiple of that amount to other customers.
If everyone turns up at the bank on the same day and asks for their money, there’s not enough to go around. We saw that a few years ago in Cyprus, during the worst (so far) of the Euro meltdown. So, a fund might claim to be worth a trillion dollars, but no one believes there’s actually a trillion dollars of physical gold behind it.
The Unreal Nature of ETFs
Another aspect of ETFs that’s often missed is that the gold held by any of these funds is not allocated to customers. So, there’s no physical vault with your gold in it, and there’s no lock-box holding whatever you may have purchased.
An ETF is essentially a paper-based asset. It’s backed by some gold, but you have no direct ownership of any one piece of gold. And the gold that is held by the ETF is probably somewhere far from you - maybe in London. No doubt it’s well protected, but you can’t get at it. You only hold a paper, or digital, share in the fund which is built on top of that gold. Or rather, balanced on top of that gold, like an inverted pyramid.
Does that sound even a little bit attractive to you?
Chances are that's not what originally drew you to the idea of purchasing gold. Many people buy gold because they want a tangible asset - something they can feel in their hands, something that will survive fire, flood, or financial meltdown. They know gold has held its value, and that it has been a trusted store of wealth since the earliest days of human civilization.
Most people choosing to store their gold with a depository or a bank would want to know that gold has their name on it - that it’s theirs, and that it’s owned by them - not fractionally, partially, or notionally "allocated" to them.
Gold owners often want to know they can withdraw their gold, not as a check in payment for their ETF share, but as physical gold which they can pass on to the next generation, something that will provide a potential hedge against uncertainty in these somewhat uncertain times, and those to come.
Purchasing Real, Tangible Gold
Gold owners want to know that whatever happens to the world economy, and the financial system, and any of the currencies now in use (including our own), they will still have an asset likely to have some real, tangible value.
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