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Gold ETF’s – Paper Gold?

Gold ETFs have become a mainstream part of many investment portfolios, including our managed accounts. The two biggest are GLD, Managed by State Street’s SPDR ETF group, and iShares IAU. GLD has over $70 billion in assets and IAU over $10 billion as of this writing.

As shares of these ETFs are created, they actually buy physical gold and store it. If shares are unwound, they sell the gold. This is what you want if you want to own gold through an ETF.

The bottom line: IAU and GLD are both reasonably good ways to get exposure to changes in the price of gold.

Those who buy it should be aware of a few things.

  • GLD charges 0.4% annual management fees, while IAU charges 0.25. This is the main reason we prefer IAU.
  • Long term gains in GLD are taxed as collectibles at 28%, not the lower long term capital gains rate.
  • In the event that the gold the ETF holds is captured or destroyed, holders are pretty much out of luck. We don’t consider this a big risk, but it is important to understand. GLD holds its gold in London, while IAU splits holdings between London, New York and Toronto.
  • There are a many conspiracy theories surrounding gold ETFs, especially GLD. We believe both ETFs are perfectly legitimate, though one can never rule out the possibility of fraud.
  • Because the ETFs are not redeemable for physical gold, it is possible that liquidity issues force the share price below the net asset value of the gold it represents for a period of time. If this occurs, it should be temporary.

Be careful if you buy other gold ETFs. Some use futures contracts which get expensive to roll over and end up costing a lot. Most people should never buy leveraged commodities ETFs.

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