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Gold Exchange Traded Funds ( ETFs) are among the American Public’s most
popular methods to hold, trade or speculate in gold. They were first offered
in the 1990’s. The largest, SPDR Gold Shares, began in 2004. The early ETFs
encountered significant resistance because gold believers demanded physical
possession of their gold. In this fashion they avoided worrying about the
entity holding their gold assets. They were sufficiently concerned with the
viability of the dollar or the advent of a financial crisis, without adding
another layer of fear that they couldn’t get their gold if they wanted it.
However, as time passed, and more unsophisticated Americans realized they needed
the protection of gold, the early reticence to the gold ETFs was overcome.
Today, the public has embraced the gold ETFs. Anyone with a stock account
can purchase or sell virtually any amount of the yellow metal in a matter of
minutes. Commissions are low. Storage concerns and finding a coin or bullion
dealer from which to buy or sell their gold, are things of the past.
SPDR Gold Shares alone holds over 27 million ounces of gold worth $35
billion. Their fees appear low at a 0.4% daily compounded rate, and their
gold is held in trust in London by the venerable HSBC Bank Plc. The Bank of
New York Mellon Asset Servicing, a division of the trusted Bank of New York
Mellon, is the trustee. While they don’t claim to have insurance for the gold
they hold in trust, this troubles me less than another potential far greater
concern.
On April 5, 1933, President Franklin D Roosevelt issued Executive Order
6102 which prohibited gold ownership, and forced Americans to surrender their
gold. That was during the depths of the Great Depression. The prior few years
witnessed countless U.S. bank runs with numerous banks going bankrupt. People
lined up before their banks in an effort to get the money they had deposited.
Many were unsuccessful.
In early 1933, the banking condition reached crisis proportions. President
Roosevelt declared a State of Emergency, and a Bank Holiday from March 6-11.
This closed our nation’s banks and created widespread hardship, because
business sharply declined and basic necessities quickly dried up.
The world is looking more and more like 1929! The European Union is facing
numerous challenges from which it and the Euro might not survive. Their
immigration problem is swelling and is placing great strain on the relations
of the various countries. Major banks in Italy, Spain, Portugal, Greece and
other nations are likely insolvent if sound banking practices were demanded
and enforced. The Depression was arguably triggered by the failure of
Credit-Anstalt of Austria, one of the world’s largest banks of the period.
The U.S. stock market has grown to an epic height and margin debt remains
near record levels after peaking last year. Both of these conditions have
often presaged major market peaks, such as the top of the 1929 Bull Market,
which were followed by devastating Bear Markets. Despite the bailout of our
major banks, many experts believe our banking system remains on tenuous
footings. Any major shock could trigger a financial meltdown which could
begin at home or abroad, and create similar great havoc as did the
Depression.
If any of the fears that motivate people to purchase gold as insurance
surface, I don’t think our government would hesitate to do whatever they deem
necessary to mitigate the damage. From time immemorial, gold has been at the
center of virtually all major monetary systems, including in the United
States. I believe if the dollar’s credibility comes into question, they will
bring gold back into ours if they think it will work. In this event, like in
1933, they would demand all the available gold, and the gold ETFs are the
most obvious targets to easily acquire large quantities of it.
It is true that SPDR Gold Shares holds its gold outside of the U.S., which
is likely the case with other gold ETFs. However, their custodian is a U.S. entity.
If our government believed the collection of gold to be in the national
interest, I am certain they would demand domestic trustees and citizens
holding gold trust shares to obey the law. One way or another, I am confident
that the government would prevail and take the gold. If our nation again
confiscates gold, all U.S. citizens, corporations and other entities holding
gold ETF shares risk losing the gold upon which they counted. They would be
observing their fears unfolding before their eyes, but would have lost their
golden insurance policy. In 1933, the government paid our citizens the
current $20.67 an ounce for their gold. Shortly thereafter they raised the
gold price to $35.
I believe the gold ETFs can be cautiously used for trading or speculation
purposes. However, for those that own gold ETF shares with the belief that
they truly own the eternal metal, I believe their premise should be
rethought. Hopefully our worst fears will not be realized, but there are
other methods to own gold that were exempt from seizure in 1933, that I plan
to discuss in a future missive. “Forewarned is forearmed.” If you continue to
hold gold ETFs for any other reason than as a trading or speculation vehicle,
be vigilant.
Dr. Richard S. Appel
www.UniqueRareCoins.com
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