Facts Every GLD Investor Must Know
by Robert Ross: Casey
Research Recommended Reading
With a seemingly
endless stream of macroeconomic risks coming down the pipeline every
day whether it is the risk of currency devaluation, sovereign
debt defaults, bond market collapses, or the ever-present "fiscal
cliff" it's no wonder that investors have turned to
the safety of precious metals.
And for good
reason: Someone who bought one ounce of gold in July of 2010 would
have gotten a return of 32%. Those who bought a year earlier would
have raked in 69.2%. And gold investors who bought during the darkest
days of the financial crisis would have realized a whopping 77.6%
funds, like the SPDR Gold Shares (GLD), is a popular way to add
gold exposure to one's portfolio. Since GLD shares are backed by
physical gold, many investors are under the impression that they
can redeem them for the actual metal at any time
but is that
We did some
digging into GLD's 10-K a comprehensive summary report of
a company's performance that must be submitted annually to the SEC
and found some interesting facts that we believe every GLD
investor should know.
Here's a hint:
Unless you own more than $16 million worth of GLD shares, don't
expect to be redeeming them in physical gold anytime soon.
let's go over some background information on how an ETF is structured.
prefer ETFs as a way to spread out market risk across multiple companies
and indices. For example, an investor would be better off buying
an ETF like SPY, which tracks the S&P 500, than buying every
S&P 500 stock individually. In short, ETFs lower transaction
costs by issuing shares in lots known as "baskets" for
a corresponding quantity of the designated assets.
Most ETFs are
organized as trusts. The company that starts the process
usually called the "sponsor" bears all the legal
and other costs of forming the trust. These include dealing with
the SEC, selecting the "Trustee" and the "Custodian,"
issuing the first fund shares, and depositing an initial tranche
of the designated assets (in the case of GLD, physical gold) with
is World Gold Trust Services (WGTS), which is owned by the World
Gold Council (WGC), an industry marketing organization funded by
gold-mining companies. BNY Mellon Asset Servicing is GLD's trustee,
and HSBC Bank USA is the custodian. As the custodian, HSBC keeps
track of and stores all of the gold that backs GLD's shares.
HSBC's vaults contain more than 41.3 million ounces of gold, secured
safely beneath the streets of London. According to the company,
gold held by the trust is not traded, leased, or loaned under any
circumstances, and no additional shares can be produced by cash
or derivative contracts. Each share represents about one-tenth of
an ounce of bullion at current market prices. But the question most
important to many gold bugs is "How can I redeem my shares
in physical gold?"
For most investors
using GLD, this is a difficult and nearly impossible
In order to qualify to redeem your GLD shares in physical gold,
you need special permission from SPDR, which is typically reserved
for brokers and market-makers like Goldman Sachs and JPMorgan Chase.
Shares can only be redeemed in batches of 100,000, which is
equivalent to 10,000 gold ounces (a little over $16 million at today's
To add insult to injury, deep inside GLD's 10-K we found that
the fund retains the option to redeem gold requests in cash rather
than the physical metal. Translation: Even with $16 million in GLD,
you still might not be able to receive your physical gold upon request.
more: since GLD is structured as a grantor trust, investors don't
pay taxes similar to regular ETFs.
As a GLD investor, you pay taxes on the underlying asset
in this case, gold. Gold, however, is taxed as a long-term holding
at a rate of 28% instead of the 15% capital gains tax you would
pay on other equities. That can certainly eat into your returns.
At least, according
to GLD spokesman George Milling-Stanley of World Gold Trust Services,
the fund is truthful about its gold holdings. Many wonder how GLD
is able to procure so much gold in the first place. But, Millings-Stanley
states, the process is easier than you would think: nearly all the
gold comes from another part of the HSBC vault.
which he claims is "about the size of a football field"
holds both the gold of many of HSBC's clients and GLD:
stores both allocated and unallocated gold. When the trust (GLD)
issues new shares, the metal to back them comes from clients of
HSBC, who have unallocated pool gold stored with the bank and
are willing to sell at the price offered. Once the authorized
participant completes the transaction, the gold is moved from
the unallocated section of the vault to the area assigned specifically
to us (GLD). Occasionally, gold will have to come from outside
of HSBC, but there's always been sufficient bullion available
from other London vaults. So transport isn't a problem, and the
market maintains a very careful chain of custody."
For those skeptical
that GLD actually has the gold it claims to have in its vaults,
he says to check the serial numbers, refiner name, fineness, and
weight of every bar, which is updated and posted every Friday on
the company's website. He also points to independent audits conducted
by Deloitte & Touche, but confesses that the firm does not count
each individual bar. Rather, they certify the "adequacy of
For those of
us who enjoy the safety and protection offered by physical gold,
GLD can have its gold holdings audited until the cows come home.
It still doesn't change the fact that only a select few of GLD's
institutional investors can redeem their shares in physical gold
when the time comes. If you are simply looking to ride the price
of gold, go ahead and use GLD as a proxy just don't confuse
ownership of shares with ownership of metal.
physical gold is the only real weapon against governments devaluing
their currencies and the runaway inflation that comes with it. Gold
has been used as money for thousands of years and has historically
always maintained its purchasing power, even in times of hyperinflation
when paper currencies became worthless. Case in point: In the 1930s,
when gold was trading at $35 per ounce, you could have bought a
good-quality suit for a one-ounce coin. Today, at a price of around
$1,600/oz, you can still get a good-quality suit for one ounce of
gold. Try to do the same with 35 of your 1930s paper dollars.
Man with permission.
Casey (send him mail)
a best-selling author and chairman of Casey
Research, LLC., publishers of Casey’s
© 2012 International