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Why Gold and Silver ETF Ownership is a Fool’s Prospect

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If you follow CNBC, Bloomberg, Fox Business, or any financial media channel, you’ve probably come across “experts” who occasionally recommend gold and silver exposure.

Now that gold and silver are hitting record highs, you are probably getting a thumbs-up to go long these metals.

But what are most of them recommending? Here are some of the top five recommendations:

  • Gold: SPDR Gold Shares (GLD), iShares Comex Gold Trust (IAU), and ETFS Physical Gold Shares (SGO)
  • Silver: iShares Silver Trust (SLV), and ETFS Physical Silver Shares (SIVR)

These are all physically-backed ETFs.

True, you may get exposure to the metals price fluctuations. But price exposure is only one benefit among others that physical gold and silver can offer.

There’s only one thing that’s missing from all of this: Ownership…of the real thing.

Instead, you get a mere paper representation of gold.

This amounts to a paper representation of ownership that you do not have.

And what does it mean to own a representation? Quite a few things, actually:

  • The actual metal is likely stored at a bank, like HSBC or JPMorgan, and under the care and control of a custodian. This means you can’t see or touch the physical stock.
  • The share of metal you own fluctuates as the fund occasionally buys or sells their metal stock; and the longer you hold on to your paper shares, the more its value is likely to erode.
  • If you need your metal for purposes of emergency, it will be near impossible to redeem (it’s not like going to your personal vault and pulling out a few gold or silver coins).
  • Some ETFs, like SGOL, will allow you to redeem the physical metal, but only if you redeem around 50,000 shares, equivalent to around $6.65 Million each redemption.
  • ETFs can be shorted, meaning your “shares” can be owned by another who is selling it short. If anything, this serves to remind you that your gold is not your gold.
  • You pay an exorbitant storage/management fee for owning paper gold (expense ratios can range be as high as 0.50%, while storage fees for the physical metals typically cost 0.15%).
  • If you sell your physically-backed ETF at a profit, and if you held it for more than a year, you will get taxed as if you had sold a collectible, as high as 28%! You were taxed as if you held the actual bullion, when in fact you owned paper.
  • If you sell your ETF after holding it less than a year, you are taxed at your regular income rate!
  • If the custodian bank fails, and if a bank “bail-in” is activated–one reason you would want to own physical gold and silver–your paper gold or silver gets seized, converted to bank capital, and in exchange, you receive shares of your failing bank’s stock.

So gold or silver ETF ownership is not the same as physical metals ownership, because the crucial missing factor is the ownership itself!

If gold and silver constitute sound money that can be privately held–money that can serve as a hedge against financial crises and bank collapses–then physically-backed ETFs are neither private nor “sound.”

ETFs will give you exposure to the growth that gold and silver can provide. But so can owning physical gold and silver coins or bullion.

The main point: with gold and silver ETFs, you pay more, you risk more, while ultimately you own nothing.

What you do own is lack of access, lack of sound money, and a paper that commits you to pay fees for something that you don’t own.

It’s fool’s gold and fool’s silver. Think twice before you buy.

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