Here’s every reason to avoid buying a gold ETF
Here’s every reason to avoid buying a gold ETF by Simon Black for Sovereign Man
Buckle up, this one’s going to be entertaining… because I should have called this note “Why you should always read the fine print.”
This morning I read through the prospectus and annual reports of the most popular Gold ETFs in the world.
First, some background:
ETF stands for ‘exchange-traded fund’. It’s sort of like a mutual fund that’s listed on the stock exchange, meaning investors can buy/sell shares of an ETF just like they would buy/sell shares of Apple, Ford, or (God help us) Netflix.
But unlike Apple, which is an operating business with employees, products, revenue, etc., an ETF is NOT an operating business. It’s a fund that merely pools capital to own assets.
The benefit for investors is that ETFs can be an easy and convenient way to invest in certain assets which would otherwise be difficult to buy.
If someone wants to buy Egyptian stocks, for example– they could open a brokerage account in Cairo… or buy an Egypt ETF that’s listed on the New York Stock Exchange.
The ETF is a LOT easier for most investors.
But there are also ETFs for gold and silver. And I find this mystifying.
We’re not talking about Egyptian stocks. Gold and silver are easy to buy. You could have Canadian Maple Leaf gold coins delivered to your home with a few mouse clicks.
So gold ETFs provide no added convenience.
Yet there’s an enormous amount of downside.
First off– it’s important to know that if you buy an ETF, you’re paying for a ton of unnecessary expenses.
The ETF has to pay custodian fees, marketing fees, listing fees to the New York Stock Exchange, audit fees, management fees, etc.
I’m chairman of the Board of Directors for a company that’s listed on a stock exchange, and trust me– the listing fees are REALLY expensive.
If you own physical gold in your own safe, you wouldn’t have to suffer the cost of paying lawyers, auditors, and investment bankers.
But GLD does. Which means that as a GLD investor, YOU are fundamentally paying those costs.
And remember that ETFs aren’t operating businesses. Apple makes money selling overpriced hardware. But GLD has no products, and hence doesn’t generate any revenue.
So how do they pay for this mountain of expenses?
By selling gold.
GLD trustees periodically sell off the gold (that’s supposedly owned by the investors) in order to pay expenses.