Why a gold investment in the SPDR Gold Shares or GLD Exchange Traded Fund (ETF) may not be such a great idea.
In the last few years, more investors are choosing to invest in gold. There are many ways to buy gold and the method you choose can be just as important as your decision to buy gold.
One of the most popular ways to buy gold is through the SPDR Gold Shares or GLD exchange traded fund (ETF). Many investors see the ETF as an easy and low-cost way of owning gold. However, you may not have known that despite gold demand increasing in the last several years and large bullion dealers such as APMEX (www.apmex.com) selling a record amount of physical gold, there has actually been a net outflow of metal in the GLD ETF.
Many investors are realizing that the GLD ETF is not as great as what it initially seems. Let’s look at some of the attributes you should consider when buying gold.
Ownership of Metal
In an ideal case, an investor would want direct ownership and title to the gold that he or she has purchased. This could be in the form of having physical gold in his or her possession by purchasing through a company like APMEX www.apmex.com, or having direct ownership and title to gold in a secure vault through a company like OneGold www.onegold.com.
Let’s look at the structure of the GLD ETF. According to the SPDR Gold Trust prospectus, an investment into the GLD ETF “represent units of fractional undivided beneficial interest in and ownership of the Trust.” The trust then owns and hold gold bars. On a high level, an investment in the GLD ETF is not direct ownership of gold, but rather ownership in a trust.
When purchasing gold, investors are oftentimes looking to decrease their counterparty risks. When owning physical metal, there is no counterparty risk, as you hold the metal in your hand. With a company like OneGold, which is backed by APMEX, the largest and most trusted precious metals dealer in the US, there is very little, if any, counterparty risk.
On the other hand, with the GLD ETF, the structure is less than ideal with so many parties involved, each with different responsibilities and varying degrees of control over the ETF. First, there is the Sponsor, or World Gold Trust Services, LLC, which oversees the fund and has some ability to make changes to the custodian where the gold is held. Next, there is the Trustee, or The Bank of New York Mellon, which is responsible for the day-to-day operations. Third, there is the Custodian, HSBC Bank plc, which stores the gold. Lastly, there is the Marketing Agent, or State Street Global Advisors Funds Distributors, LLC.
1:1 Metal Backing and Metal Inventory Report
Ideally, an investor would want his or her investment in gold backed ounce for ounce. When owning physical metal, confirming the metal is easy. However, when owning vaulted metal or metal stored on your behalf, ensuring your investment is backed on an ounce for ounce basis becomes a little more complicated. In these cases, an investor should consider a few things including
A company like OneGold first starts by sourcing metal. This metal is next stored at OneGold’s custodian partners. Metal is then made available for sale. In the event that metal demand exceeds available inventory, OneGold will pause sales until additional metal can be sourced to ensure an ounce for ounce metal backing. OneGold only uses the most trusted custodians, such as Brinks and Loomis. In addition, OneGold publishes monthly inventory reports which can be viewed online.
On the other hand, the same cannot be said for the GLD ETF. The GLD ETF does publish an inventory report showing all bars held in the ETF. However, the structure with the custodian is far from ideal. Metal is held at the Custodian, HSBC Bank plc, which is based in London. According to the GLD ETF prospectus
“There may be periods of time when some portion of the Trust’s gold bars will be held by one or more subcustodians appointed by the Custodian or by a subcustodian of such subcustodian”.
Another item an investor should consider before buying gold is whether the company conducts an independent audit of its metal inventory. For its US, UK and Switzerland products, a top 5 accounting firm conducts a bi-annual audit of the metal inventory. For its Canada products, the Government of Canada audits the metal inventory.
For the GLD ETF, little information is available regarding an audit. The Marketing Agent, State Street Global Advisors, has an FAQ document stating that the Trustee, Sponsor and its representatives “visit and inspect the Trust's gold held in the Custodian’s vault facility.” The document also mentions an independent auditor in a single sentence, but does not provide any details. When looking at the GLD ETF 10-K annual report, the only Principle Accounting Fees and Services listed related to financial and regulatory audits. There are no expenses for an inventory audit.
Another important consideration when buying gold is making sure it is kept safe. In most cases, this requires having an insurance policy with proper coverage from a reputable insurance provider. In the case of the GLD ETF, the prospectus clearly states
“The Trust does not insure its gold. The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold.”
With the GLD ETF, pricing may appear to be straightforward. An investor may assume he or she just needs to look up the GLD ticker to get a price. However, with many ETFs, the price may trade at a premium or a discount to net asset value or NAV. The NAV measures the price of all the fund’s assets minus the fund’s liabilities divided by the number of shares outstanding. If buying or selling a large position of the GLD ETF, an investor should be aware of whether the fund is trading at a premium or discount to NAV.
Ongoing Storage and Management Costs
With any investment, an investor should be conscious of the costs. With the many parties involved in the GLD ETF, annual management fees run at 0.40%. At first, this may not seem like a high fee. However, just as investment returns compound to build wealth, management fees compound and can significantly erode wealth over time.
Setup Time / Ease of Use
In the last several years, investors of all ages and demographics are looking to purchase gold. Traditionally, to begin investing, an investor must first set up a brokerage account. Depending on the investor’s investable assets, some investors may not qualify for a brokerage account at certain firms. The next step would be for the investor to send funds to the broker, typically by bank wire or bank ACH. The investor must then wait for funds to clear before making an investment. In addition, when making an investment, most brokerages only allow transactions during trading hours.
With OneGold, we have simplified the investment process. You can set up a free account within minutes. There is no minimum account size. You can send funds and then make a transaction, or make a transaction and pay later. For convenience, we accept bank wire, bank ACH, credit card, PayPal and Bitpay. You can buy and sell at anytime, even when the markets are closed. You can execute transactions on both the OneGold mobile app or OneGold website. If you want to use gold as a savings account, OneGold offers a program called AutoInvest where an investor can purchase a fixed dollar or ounce amount of gold in a set period.
Withdrawing Funds & Redeeming Metal
When it comes time to liquidate your metals holdings, OneGold makes it easy. Investors can sell metal in minutes and request a withdraw via bank wire or bank ACH directly to your bank account or via check mailed to your address. Processing times are typically same or next business day. In addition, if you want to take possession of your metals, OneGold offers a redemption option where metal can be converted into any of the 20,000+ products available at APMEX.
On the other hand, liquidating metals to cash in the GLD ETF will largely depend on your broker. In most cases, it will not be possible to receive funds on the same or next business day. In addition, if you want to redeem your position in the GLD ETF for physical metal, it is basically not possible. The minimum redemption for the GLD ETF is 100,000 shares, or roughly $16MM.
What is OneGold?
OneGold is an online platform founded by APMEX and Sprott that allows users to buy, sell and own vaulted positions of physical precious metals. We offer gold, silver and platinum stored in various vaults around the world, including the US, Canada, Switzerland and the UK.
OneGold offers the benefits of owning physical gold without any of the downsides. All positions are fully backed on an ounce for ounce basis. Metal is fully insured against theft and loss at secured facilities at Brinks, Loomis, The Royal Canadian Mint and APMEX. OneGold also offers the liquidity of an exchange traded fund (ETF) and pricing that is much more competitive than buying physical bullion bars and coins. If you want to dollar cost average into gold and silver like a corporate 401K plan, OneGold offers an AutoInvest feature where you can buy a set amount of gold and silver at regular intervals
How OneGold Compares Against the GLD ETF
|1:1 Metal Banking||Yes||?|
|Setup Time||Minutes||Requires Brokerage Account|
|Ease of Use||Lock in anytime||Pre-fund and wait|
|Payment Methods||Wire, ACH, Credit card, Paypal, Bitpay||Wire or ACH|
|Pricing||Fixed Premium||Could trade at premium or discount to NAV|
|Vaulting Option||Loomis, Brinks, RCM, CNT, APMEX||Unspecified|
|Vaulting Locations||US, Canada, UK, Swizerland||Unspecified|
|Audit||Top 5 Accounting Firm||?|
|Storage / Management Fee||0.12% to 0.30%||0.40% to 0.50%|
|Insurance||Lloyds of London||?|
|Physical Redemption||Yes, any of APMEX’s 20K+ products, no minimum||Account minimums ($800K)|
|Dollar Cost Average Ability||Yes, through AutoInvest||No|
|Liquidity||Instant, Receive wire or ACH Same day||Varies on broker|