GLD - another kind of risks

In this turbulent time, investors are flocking into gold. But gold as a last safe heaven exists on the planet earth, it  faces hidden risks that is unaware of by most investors, probably 99% of them.

Gold being traditionally traded as a commodity after delink of USD from gold by Richard Nixon, it is changing faces due to introduction of paper gold. GLD being one of them.

GLD, as gold ETF, is a paper gold; which investors buy on the paper promise. The ETF management would buy the physical gold to store in the secure vault outside of London.  Each share of GLD represents 1/10th of an Oz of gold, minus yearly management fees.

So where are the risks?

The number one risk is the confiscation of gold by government. It happened in 1930's by President Roosevelt. In this case, the ETF will cease to exist by selling its gold in the open market and distribute the proceeds to the individual investors, in USD. But we know, the reason of buying gold is to insure the collapse of USD. The distribution of ETF will counter the purpose of purchasing GLD, for its insurance can not ultimately save the investors. We knew from history after Roosevelt did his confiscation, the gold price jumps from $20 something per oz to $35 something per oz, a 75% hike.

The second risk is the dry up of physical gold market. When Comex gold trading contracts can not be delivered, the ETF will not be able to trade any more. Will this happen? It will happen, the physical gold price will double for the least in a very short time, say a week or two. This directly linked into the third risk.

The third risk is the un-audited gold storage. We really do not know the quantities of gold stored in the London vault. We see the pictures, but we do not know for sure if they really hold the amount of gold equals to the ETF shares. It is entirely possible that GLD would run like fractional banking system, that the management will issue more shares of GLD but actually holding much less gold. Now with physical gold market dry up and ETF shareholders demand for gold distribution, the ETF can very well be suffer a huge loss while physical gold market skyrockets.

For those foreseen these risks, they would and should swamp into physical gold market.

But unfortunately, the retail gold market is already dried up. It is difficult to find gold coins and bars without paying for a large premium. In that sense, a small portion of investors are really smart to load the gold up long time ago.

Unfortunately, most investors are still living the Real-Estate-get-rich-dreams and stock-get-rich-dreams, including many in this web site. They never understood the economy fundamentals and scenarios that form the mega trend. Nor did they ever knows what economy trend will play out in what geopolitical scenes.

We shake our heads and watching them in pity, for they never study the world history and reasons for each mega economy trends. Some of them would even crown themselves as gurus of any kinds but in reality they are only the small opportunists, who would never gain in a long run.