This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Do Gold and Silver ETFs Make Good Investments?

Stocks in this article: SGOL GLD IAU SLV SIVR ABX NEM GG

Those are the facts around silver and gold ETFs, now for the controversy. For examples, I will use the GLD's prospectus as a proxy as it is the second largest ETF in the world.

First off, there are questions as to the quality of the gold and silver in ETFs. Page 11 of the GLD's prospectus reads, "neither the Trustee nor the Custodian independently confirms the fineness of the gold bars allocated to the Trust in connection with the creation of a Basket." Basically you don't know the grade of the gold you "own."

Secondly, the trustee does not insure the gold, the custodian does and their liability is very limited. The custodian is only made responsible for damages to the gold they directly inflict, but if the gold isn't good or is in fact wooden bars painted gold (but they didn't do it), then most likely the custodian would be protected and the trustee wouldn't be liable.

Also hidden in the prospectus is the fact that a custodian is free to store the gold with sub-custodians until the gold is delivered to the custodian's main vault. In other words, the gold can be in various places at once. When the gold is with the sub-custodians, it's on its own. The prospectus says "failure by the sub-custodians to exercise due care in the safekeeping of the Trust's gold bars could result in a loss to the Trust."

The sub-custodians are not accountable for the gold they store and are also free to appoint other sub-custodians to hold the gold. The trustee also has no right to visit the sub-custodians to examine the gold or check out its records. The trustee may visit the gold in the custodian's vault but only on a limited basis. There is usually one independent audit at the end of the year and one surprise audit.

Also, since most custodians are banks, if they fail, the trust becomes an unsecured creditor. There might be a substantial delay or fees associated with obtaining the allocated gold. Granted the custodians are reputable large investment banks, but as we saw in 2008, any of them can become insolvent.

Another big issue some analysts have with the ETFs is the fact that JPMorgan and HSBC, both custodians, have short positions in the gold market. Chris Powell, secretary and treasurer of the Gold Anti-Trust Action Committee, which argues that governments manipulate the gold price, says " We doubt the reliability of the major gold and silver ETFs ... because their metal can be borrowed by parties seeking to drive previous metal prices down, against the interest of ETF investors ... these short positions are not disclosed in the ETF prospectuses."

Nevertheless, the GLD has rallied 17% this year in tandem with the gold price.

Another worry is that because the ETFs can have unallocated futures contracts, they might have to roll over their futures positions and get caught out of the money, namely that the contract they hold would become worthless. In that scenario, the ETFs would not be as closely correlated to the spot price of their underlying metal but to options expirations instead.

Don Dion, portfolio manager of ETF Action, argues that the rollover issue is more of a problem with gold exchange-traded-notes that are entirely based on futures contracts. "Since physically backed ETFs don't rely on futures contracts for their strategy, price dislocation is not an issue ... Investors don't have to worry about the rolling of futures impacting the price of their fund."

These issues have led many gold bugs and conspiracy theorists to shout warnings about the safety of precious metal ETFs: Does the gold you think you own really exist and in what form?

However, despite these risks, for an investor looking for pure exposure to the gold price, ETFs are an attractive option to trade, speculate and hedge. Here are the facts you need to know about the five physically backed silver and gold ETFs available in the U.S.

2 of 7

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs