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 "