On the surface, buying a bullion-backed exchange-traded fund seems harmless. Gold ETFs track the price of the metal, don’t require you to store any bullion, and even list the serial numbers of the bars on their website.
But similar to the old joke about “waterfront” land in Florida that turns out to be swampland, so too are these products once you glance under the hood. The reality is, bullion ETFs carry much greater risk than most investors realize. Further, a crisis of any serious nature may demand that you have more than just price exposure, but actual metal in your possession.
This article examines the key structural defect that comes with all bullion ETFs, three specific risks you face with current ETF products, and the fundamental reason investors need a meaningful amount of physical gold and silver in their possession.
The One Sentence Every Bank Customer Fears
Imagine you log on to your bank account to withdraw some cash, and receive a notification that includes the following statement:
- “We regret to inform investors that cash withdrawals are not permitted at this time.”
The thing is, this is not fiction… it’s not some old reference to the Great Depression… and it didn’t occur in a third world country. It happened in Great Britain, in 2011.
Within 11 days after Britain voted to leave the EU (aka, Brexit), M&G Investments, Aviva Investors, and Standard Life all temporarily banned clients from withdrawing funds due to “extraordinary market conditions.”
These are not small, obscure funds in the UK. Each manages billions of British pounds. Because of the unexpected outcome on Brexit, however, it quickly became apparent that continued redemptions would force management to dump assets at fire-sale prices....