What is the GLD? - Bullion vs ETFs

What is a Gold Exchange-Traded Fund?

While allocated physical gold is, in our opinion, the best way to invest in gold, it is not the only way. An exchange-traded fund (ETF) is a type of security, a fund, that can be traded on the stock exchange. They may contain assets such as stocks, bonds, index funds, or commodities. A gold exchange-traded fund sells shares in a fund made up of gold bullion assets.

The main idea behind these funds is that it allows an individual to invest in gold bullion without the additional costs and commitments of holding physical gold such as premiums and storage costs. The most famous of these funds is the GLD. GLD is the ticker symbol for the SPDR Gold Shares ETF, which was founded in November 2004 and is traded on the New York Stock Exchange Arca (NYSE Arca). The GLD was designed to track the gold price, with investors owning shares in the fund’s 839 tonnes of gold bullion. Shares in the GLD are valued at the price of one-tenth of an ounce of gold per share, making them a more accessible option for those with smaller budgets, or those who wish to invest in a more fluid flexible asset supported by the gold price.

As it is backed by physical gold, a gold ETF share will fluctuate in line with the gold spot price. When the value of gold increases, the value of an investor’s shares in a gold-backed fund will do the same and when gold falls, so too will the value of the gold ETF. As such an investor can make money when the gold price rises, and lose money when it falls, in the same way that anyone who owns physical gold can.

This can be a convenient way to access the safe-haven that gold bullion is known to provide and, with smaller initial costs it would be easy to assume that ETFs are a worthy replacement for physical bullion, offering an investor the security of owning gold without the premiums or the issue of storage.

However, the truth is that while these funds are supported by gold bullion, a gold ETF isn’t a contractual entitlement to own any physical gold. An ETF shareholder effectively owns a debt that is supported by the fund’s bullion assets, but they are not the rightful owner of any specific piece of gold. Gold exchange traded funds make up an industry worth trillions of dollars, and one from which many investors across the world regularly benefit. However, it is incredibly unlikely that this amount of debt is supported by an equivalent amount of physical gold. In the event that the bank or institution issuing the ETF becomes insolvent, then, it is very unlikely that its creditors- investors in gold backed ETFs- would be able to recuperate their initial investment. Although there are benefits to investing in ETFs, then, it seems somewhat illogical to choose a safe-haven investment that isn’t particularly safe when you can physically own the real thing for a similar fee. Gold exchange-traded funds have faced criticism for its complexity and transparency. The GLD was, for several years, the second largest exchange traded fund on the planet but it is no longer even in the top 10- an indicator that investors look more favourably on other forms of investment?

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