Features

Do gold ETFs make safe investments?

One hedge fund believes that gold exchange-traded funds offer none of the benefits of owning physical gold, and could even leave you investing in gold that doesn't belong to you. Paul Amery finds out whether this is true.

"No serious professional investor should own gold exchange-traded funds (ETFs)," reckons hedge fund Hinde Capital. ETFs offer "none of the benefits of physical gold ownership" and in fact may own "encumbered" gold, the firm says someone else may have a claim on metal that you thought was yours. Hinde has its own axe to grind: it charges hedge-fund fees to own gold-related investments. Still, does the firm have a point?

In fact, the largest UK-listed gold trackers ETF Securities' Physical Gold (LSE: PHAU) and Gold Bullion Securities (LSE: GBS) aren't ETFs at all. They are notes (debt securities) issued by Jersey-based firms, backed by holdings of bullion, and described as 'ETCs'. This choice of legal structure is down to Europe's UCITS rules, which govern investment funds. These rules do not permit a fund to invest in a single commodity, nor to own gold directly (although, confusingly, both non-EU Switzerland and the US do permit ETFs that own only bullion). So are these ways of holding gold safe?

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

It's impossible to generalise about fund and note structures, but most have common ground. They typically hold almost all bullion in "allocated" form (meaning the custodian holds a certain number of bars that are the sole property of the gold note or fund). So unless you believe the custodian is lying, this gold isn't encumbered. Only when there's a creation or redemption does part of the gold holding temporarily become "unallocated", representing some settlement risk to a market counterparty.

ETF Securities' website explains that in the event of its own bankruptcy, its ETCs are ring-fenced, while if the custodian of the gold, HSBC, fails, the Trustee should step in on behalf of the owners (ie, investors in the ETCs) and take control of the gold. It's fair to point out, as Hinde does, that the ownership mechanism hasn't been tested in a bankruptcy. But to suggest that gold confers none of the benefits of physical gold ownership seems absurd, given that gold ETFs and ETCs have drawn so much money in the last decade for doing precisely that.

Advertisement
Advertisement - Article continues below

There are other ways to own gold. Bullion Vault offers perhaps a simpler holding structure and compares well with ETFs for larger investors and longer holding periods. Or, if you're really concerned about using a financial intermediary, you can buy bullion and store it yourself although you'll incur higher costs.

Paul Amery edits www.indexuniverse.eu, the top source of news and analysis on Europe's ETF and index-fund market.

Advertisement

Recommended

Visit/analysis/600647/when-etfs-cant-work-miracles
Analysis

When ETFs can’t work miracles

Bond ETFs can be cheap and liquid, but tracking high-yield debt is more difficult than tracking stocks.
20 Jan 2020
Visit/520466/gold-dont-panic-and-dont-sell
Gold

Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020
Visit/520221/heres-how-gold-could-rise-above-7000-an-ounce
Commodities

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019
Visit/520199/gold-is-in-a-bull-market-and-it-could-have-much-further-to-go
Commodities

Gold is in a bull market – and it could have much further to go

Many investors forget that gold is still the best-performing asset of this century, says Charlie Morris. It could also have much further to go.
27 Dec 2019

Most Popular

Visit/investments/property/house-prices/600840/the-biggest-risk-facing-the-uk-housing-market-right-now
House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
Visit/currencies/600842/eur-usd-euro-slide-against-us-dollar
Currencies

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020
Visit/investments/stocks-and-shares/share-tips/600811/three-overlooked-stocks-to-buy-now
Share tips

Three overlooked stocks to buy now

Each week, a professional investor tells us where he’d put his money. This week: Joe Bauernfreund, portfolio manager at the AVI Global Trust, highligh…
17 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019