Gold ETF "Guarantee"

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Call_Me_Op
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Gold ETF "Guarantee"

Post by Call_Me_Op »

As a correlate to the recent post on Jack Bogle recommending a small allocation to gold for a long-term portfolio, I started to wonder about holding gold in ETF form and whether there are any assurances that (in a time of crisis) an ETF holder (of GLD, for example) can liquidate his or her gold position at close to the spot price of gold. Any thoughts on this?
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Re: Gold ETF "Guarantee"

Post by alex_686 »

No. During times of liquidity crisis all bets are off.

Read up on the ETFs. Some hold physical gold, others futures. In either case I assume if you can ride out the crisis for a week or 3 you should be good.
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Re: Gold ETF "Guarantee"

Post by dbr »

It seems to me that if the premise is that gold is held in event of an undefined, unprecedented crisis then no assumptions are safe including the assumption that gold would have any value at all.

If the anticipated crisis can be described more explicitly then it is possible to conclude what might or might not be safe.

If the concept is an insurance concept then it would be wise to read the policy for hazards covered.
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Re: Gold ETF "Guarantee"

Post by Dialectical Investor »

Even if a guarantee was made, that doesn't mean it will be honored, and it might not even be the guarantor's fault. For instance, selling the ETF might be impossible because your broker's systems might be down, or the market may be closed.
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Re: Gold ETF "Guarantee"

Post by All Seasons »

Make half of your gold holdings physical and the other half digital.

That way you get the robustness and security of physical holding, and the liquidity of ETFs for ease of rebalancing and such. Best of both worlds.
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Re: Gold ETF "Guarantee"

Post by Phineas J. Whoopee »

This information may be more basic than the question, but holding shares in a gold ETF does not entitle you to go to their door and receive physical gold in return for the shares, even if the ETF keeps all of it physical.
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Re: Gold ETF "Guarantee"

Post by robertmcd »

In my opinion in any crisis where gold performs incredibly well, not just decent, delivery contracts won't be worth the paper they are printed on.
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Re: Gold ETF "Guarantee"

Post by All Seasons »

If you want maximum convertibility from your ETF shares to physical in the event of disaster, then you should ONLY buy shares of Sprott Physical.

Closed end, fully allocated, and unencumbered.
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Re: Gold ETF "Guarantee"

Post by willthrill81 »

dbr wrote: Fri Jan 18, 2019 10:17 am It seems to me that if the premise is that gold is held in event of an undefined, unprecedented crisis then no assumptions are safe including the assumption that gold would have any value at all.
This is of course true of gold as it is true of any asset. Even 'hard' assets like real estate can be confiscated.

Given that the use of gold as a store of value extends beyond recorded human history, even during very 'primitive' periods, I'd say that it's a pretty safe bet that it will continue to serve that role through just about any crisis that might occur. That being said, gold isn't the only physical asset that it would be prudent to have on hand for such an event though, not by a long shot. There are many others that are farther up on the list of importance. But people too often think in binary terms where the option aren't binary. For instance, it's not 'food instead of gold', it's 'food and gold'.
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Re: Gold ETF "Guarantee"

Post by All Seasons »

willthrill81 wrote: Fri Jan 18, 2019 4:26 pm
dbr wrote: Fri Jan 18, 2019 10:17 am It seems to me that if the premise is that gold is held in event of an undefined, unprecedented crisis then no assumptions are safe including the assumption that gold would have any value at all.
This is of course true of gold as it is true of any asset. Even 'hard' assets like real estate can be confiscated.

Given that the use of gold as a store of value extends beyond recorded human history, even during very 'primitive' periods, I'd say that it's a pretty safe bet that it will continue to serve that role through just about any crisis that might occur. That being said, gold isn't the only physical asset that it would be prudent to have on hand for such an event though, not by a long shot. There are many others that are farther up on the list of importance. But people too often think in binary terms where the option aren't binary. For instance, it's not 'food instead of gold', it's 'food and gold'.

This is true. People often lament that gold's value is only "cultural" or something along those lines.

That's actually gold's strength. Unlike the dollar, it's not valuable just because some authority arbitrarily declares it so.

Gold is valuable because the market, beyond any central authority, has determined that it's valuable.
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Re: Gold ETF "Guarantee"

Post by stuper1 »

When people want to bury their head in the sand, it seems a lot of times they like to put a strawman on top. :wink:

(I'm agreeing with willthrill81.)
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Re: Gold ETF "Guarantee"

Post by GRP »

stuper1 wrote: Fri Jan 18, 2019 4:31 pm When people want to bury their head in the sand, it seems a lot of times they like to put a strawman on top. :wink:

(I'm agreeing with willthrill81.)
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Re: Gold ETF "Guarantee"

Post by JoMoney »

I posted these snips from the GLD prospectus in another thread, which got locked (as is typical with Gold threads)...
https://us.spdrs.com/library-content/pu ... PECTUS.pdf
... The amount of gold represented by the Shares will continue to be reduced during the life of the Trust due to the sales of gold necessary to pay the Trust’s expenses irrespective of whether the trading price of the Shares rises or falls in response to changes in the price of gold...

... The sale of the Trust’s gold to pay expenses at a time of low gold prices could adversely affect the value of the Shares...

... Shareholders do not have the protections associated with ownership of shares in an investment company registered under the Investment Company Act of 1940 or the protections afforded by the CEA...

... Shareholders’ recourse against the Trust, the Trustee and the Sponsor, under New York law, the Custodian, under English law, and any subcustodians under the law governing their custody operations is limited. The Trust does not insure its gold. The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody. The Trust is not a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage. Therefore, Shareholders cannot be assured that the Custodian will maintain adequate insurance or any insurance with respect to the gold held by the Custodian on behalf of the Trust. In addition, the Custodian and the Trustee do not require any direct or indirect subcustodians to be insured or bonded with respect to their custodial activities or in respect of the gold held by them on behalf of the Trust. Consequently, a loss may be suffered with respect to the Trust’s gold which is not covered by insurance and for which no person is liable in damages. ...

...In addition, the Custodian will not be liable for any delay in performance or any non-performance of any of its obligations under the Custody Agreements by reason of any cause beyond its reasonable control, including acts of God, war or terrorism. As a result, the recourse of the Trustee or the investor, under English law, is limited.
Furthermore, under English common law, the Custodian or any subcustodian will not be liable for any delay in the performance or any non-performance of its custodial obligations by reason of any cause beyond its reasonable control.
...

...The gold bullion custody operations of the Custodian are not subject to specific governmental regulatory supervision...
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Re: Gold ETF "Guarantee"

Post by willthrill81 »

JoMoney wrote: Fri Jan 18, 2019 4:45 pm I posted these snips from the GLD prospectus in another thread, which got locked (as is typical with Gold threads)...
https://us.spdrs.com/library-content/pu ... PECTUS.pdf
... The amount of gold represented by the Shares will continue to be reduced during the life of the Trust due to the sales of gold necessary to pay the Trust’s expenses irrespective of whether the trading price of the Shares rises or falls in response to changes in the price of gold...

... The sale of the Trust’s gold to pay expenses at a time of low gold prices could adversely affect the value of the Shares...

... Shareholders do not have the protections associated with ownership of shares in an investment company registered under the Investment Company Act of 1940 or the protections afforded by the CEA...

... Shareholders’ recourse against the Trust, the Trustee and the Sponsor, under New York law, the Custodian, under English law, and any subcustodians under the law governing their custody operations is limited. The Trust does not insure its gold. The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody. The Trust is not a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage. Therefore, Shareholders cannot be assured that the Custodian will maintain adequate insurance or any insurance with respect to the gold held by the Custodian on behalf of the Trust. In addition, the Custodian and the Trustee do not require any direct or indirect subcustodians to be insured or bonded with respect to their custodial activities or in respect of the gold held by them on behalf of the Trust. Consequently, a loss may be suffered with respect to the Trust’s gold which is not covered by insurance and for which no person is liable in damages. ...

...In addition, the Custodian will not be liable for any delay in performance or any non-performance of any of its obligations under the Custody Agreements by reason of any cause beyond its reasonable control, including acts of God, war or terrorism. As a result, the recourse of the Trustee or the investor, under English law, is limited.
Furthermore, under English common law, the Custodian or any subcustodian will not be liable for any delay in the performance or any non-performance of its custodial obligations by reason of any cause beyond its reasonable control.
...

...The gold bullion custody operations of the Custodian are not subject to specific governmental regulatory supervision...
Thanks. I'm really not surprised. When it comes to gold, I'm far more attracted to physical than paper.
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Re: Gold ETF "Guarantee"

Post by raven15 »

I've been reading "Big Debt Crises" by Ray Dalio. I have definitely been getting the impression that paper gold is just as valuable as real paper and electronic gold is just as valuable as real electrons. If you find yourself owning gold that is a few protons short and you suspect a crisis is coming where gold will be the secret sauce, you will want to acquire those extra protons ASAP.
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Re: Gold ETF "Guarantee"

Post by JoMoney »

Paper/Electronic "Gold" is ideal for trading. It has the lowest transaction expenses, easy liquidity, potential leverage, and easy shorting (for those who want to try and earn carry interest by shorting gold and going long cash or other assets)...
It's not ideal for anyone who wants gold for decorative, collectible, anything tangible, or apocalyptic scenarios.
So you kind of need to figure out what you expect to use it for, if you want to be able to easily "rebalance" it with other pieces of your portfolio quickly and easily with minimal cost maybe that's where an ETF would work. If you want something physical in your disaster go-bag you might want a coin. If you want something to wear and make a flashy show of, you might want jewelry.
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Re: Gold ETF "Guarantee"

Post by Ferdinand2014 »

OUNZ is an ETF that is unique in that it allows you to exchange your ETF shares for actual Gold in bullion or bar form with as little as 1 ounce American Gold Eagle. VanEck Merk Gold Trust - https://www.vaneck.com/etf/commodity/ou ... -delivery/ - is the firm providing the ETF. Its ER is a bit higher than the paper trading ETF's of questionable backing. It is the only gold ETF that allows this. However if you are concerned by this, I would just buy gold bullion and put it in a safe. I would stick to easily recognizable gold in government bullion form such as the Canadian Maple Leaf, or American Eagle if you live in North America. A good site that offers low spot price and is reputable and quick is https://sdbullion.com/. I have personally used them and they are quick, reliable and the lowest over spot that I am aware of. I personally gave up the gold bug idea a while back, but am generally agnostic and understand the desire. As I watch Venezuela fall apart its chickens, gas and USD people trade and want, not gold. Warren Buffett has a great analogy of his thoughts on gold, it starts at 1:47: https://www.youtube.com/watch?v=BtN17EGeVVA
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Re: Gold ETF "Guarantee"

Post by sabtastic »

So many gold threads lately.

The gold trusts are different than most investments and can vary wildly so as always it is a good idea to read your prospectus carefully. Remember it is called a TRUST for a reason.

There seems to be two groups of people here, those that are preparing for generalized political/societal failure and those that believe central banks have lost credibility and want some insurance for a potential currency crisis. For large scale political failure willthrill's idea is best. A small stash to ensure some purchasing power would not be a bad idea just like holding water, food etc. The gold will certainly hold more value than cash over time as dollars are being devalued at a set rate by the central banks due to inflation.

The TRUST etfs are purchased by most as insurance against a currency crisis, and I believe liquidity will not be an issue if that crisis does occur. If anything the shares will be in high demand as everyone panics. This is what a lot of the proponents of gold are pushing a la Peter Schiff. The PROBLEM I forsee is if the liquidity crisis does NOT occur and many of these speculators bail out. The run up to gold started in the early 2000s and current prices could easily fall relative to the dollar if faith in central banks returns. Lets say gold falls by 1/3 or 1/2 as everyone starts selling. The ETF will have to sell gold to repay investors and it will enter a death spiral as the price of gold continues to drop. In that case liquidity WOULD be a problem and those that buy today would suffer a significant loss as they are forced to sell way below market to get any money back at all. Remember for these trusts gold is the ONLY asset they possess, so they are FORCED to liquidate if everyone panics. Eventually when a bit coin trust ETF arrives this will contain the same risks as above.

This is why a commodity based currency is so important instead of a fiat based currency. There would be no need for speculation if you were confident your cash would hold value over time. There should be no need to have faith in the polices of a central bank.
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Re: Gold ETF "Guarantee"

Post by JoMoney »

sabtastic wrote: Sat Jan 19, 2019 10:30 am...This is why a commodity based currency is so important instead of a fiat based currency. There would be no need for speculation if you were confident your cash would hold value over time. There should be no need to have faith in the polices of a central bank.
Not having a commodity based currency is important. Commodities are vulnerable to the market being cornered and manipulated to nefarious ends. It unnecessarily restricts economic activity to the availability of some commodity and elevates the value of that commodity that may have other more useful purposes, along with the time spent from people seeking it out. Fiat currencies have issues, but shiny rocks shouldn't be held in such high esteem either.

FWIW, Cowry Shells are the oldest and mostly widely used form of money
https://en.wikipedia.org/wiki/Shell_money
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Re: Gold ETF "Guarantee"

Post by willthrill81 »

JoMoney wrote: Sat Jan 19, 2019 2:37 pm
sabtastic wrote: Sat Jan 19, 2019 10:30 am...This is why a commodity based currency is so important instead of a fiat based currency. There would be no need for speculation if you were confident your cash would hold value over time. There should be no need to have faith in the polices of a central bank.
Not having a commodity based currency is important. Commodities are vulnerable to the market being cornered and manipulated to nefarious ends. It unnecessarily restricts economic activity to the availability of some commodity and elevates the value of that commodity that may have other more useful purposes, along with the time spent from people seeking it out. Fiat currencies have issues, but shiny rocks shouldn't be held in such high esteem either.

FWIW, Cowry Shells are the oldest and mostly widely used form of money
https://en.wikipedia.org/wiki/Shell_money
Agreed.

The real issue that sabtastic brings up is one that I've wondered about myself: why should the central banks seek for 2% inflation? Wouldn't 0% inflation be better for everyone, except possibly except from a debt perspective? My supposition is that they seek to target inflation because they're so afraid of deflation.
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Re: Gold ETF "Guarantee"

Post by JoMoney »

willthrill81 wrote: Sat Jan 19, 2019 3:04 pm... why should the central banks seek for 2% inflation? Wouldn't 0% inflation be better for everyone, except possibly except from a debt perspective? My supposition is that they seek to target inflation because they're so afraid of deflation.
That's the reason they give
https://www.federalreserve.gov/faqs/economy_14400.htm
...a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling--a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.
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Re: Gold ETF "Guarantee"

Post by sabtastic »

JoMoney wrote: Sat Jan 19, 2019 2:37 pm
sabtastic wrote: Sat Jan 19, 2019 10:30 am...This is why a commodity based currency is so important instead of a fiat based currency. There would be no need for speculation if you were confident your cash would hold value over time. There should be no need to have faith in the polices of a central bank.
Not having a commodity based currency is important. Commodities are vulnerable to the market being cornered and manipulated to nefarious ends. It unnecessarily restricts economic activity to the availability of some commodity and elevates the value of that commodity that may have other more useful purposes, along with the time spent from people seeking it out. Fiat currencies have issues, but shiny rocks shouldn't be held in such high esteem either.

FWIW, Cowry Shells are the oldest and mostly widely used form of money
https://en.wikipedia.org/wiki/Shell_money
I will refute you with one question. Say you open great grandma's hidden safe lost since 1913. Would you rather find cowry shells, ounces of gold or $20 bills?
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Re: Gold ETF "Guarantee"

Post by JoMoney »

sabtastic wrote: Sat Jan 19, 2019 11:20 pm
JoMoney wrote: Sat Jan 19, 2019 2:37 pm
sabtastic wrote: Sat Jan 19, 2019 10:30 am...This is why a commodity based currency is so important instead of a fiat based currency. There would be no need for speculation if you were confident your cash would hold value over time. There should be no need to have faith in the polices of a central bank.
Not having a commodity based currency is important. Commodities are vulnerable to the market being cornered and manipulated to nefarious ends. It unnecessarily restricts economic activity to the availability of some commodity and elevates the value of that commodity that may have other more useful purposes, along with the time spent from people seeking it out. Fiat currencies have issues, but shiny rocks shouldn't be held in such high esteem either.

FWIW, Cowry Shells are the oldest and mostly widely used form of money
https://en.wikipedia.org/wiki/Shell_money
I will refute you with one question. Say you open great grandma's hidden safe lost since 1913. Would you rather find cowry shells, ounces of gold or $20 bills?
I'd rather find a solution to cold fusion, a cure for cancer, or her 10,000 shares of Apple from the 1980s.
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Re: Gold ETF "Guarantee"

Post by sabtastic »

JoMoney wrote: Sat Jan 19, 2019 3:17 pm
willthrill81 wrote: Sat Jan 19, 2019 3:04 pm... why should the central banks seek for 2% inflation? Wouldn't 0% inflation be better for everyone, except possibly except from a debt perspective? My supposition is that they seek to target inflation because they're so afraid of deflation.
That's the reason they give
https://www.federalreserve.gov/faqs/economy_14400.htm
...a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling--a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.
The entire reason is from a debt perspective. The rate of spending vastly outpaces any possible recovery from taxation, so inflation is a way of reducing debt over time. In theory it should work well, albeit at the expense of savers and wage earners. It is wonderful for those who have most of their wealth in assets or have access to the deflated currency first like banks. Anyway, we are getting off topic so I won't respond any more since I will feel guilty getting this thread locked
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Re: Gold ETF "Guarantee"

Post by JoMoney »

sabtastic wrote: Sat Jan 19, 2019 11:38 pm
JoMoney wrote: Sat Jan 19, 2019 3:17 pm
willthrill81 wrote: Sat Jan 19, 2019 3:04 pm... why should the central banks seek for 2% inflation? Wouldn't 0% inflation be better for everyone, except possibly except from a debt perspective? My supposition is that they seek to target inflation because they're so afraid of deflation.
That's the reason they give
https://www.federalreserve.gov/faqs/economy_14400.htm
...a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling--a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.
The entire reason is from a debt perspective. The rate of spending vastly outpaces any possible recovery from taxation, so inflation is a way of reducing debt over time. In theory it should work well, albeit at the expense of savers and wage earners. It is wonderful for those who have most of their wealth in assets or have access to the deflated currency first like banks. Anyway, we are getting off topic so I won't respond any more since I will feel guilty getting this thread locked
As long as the spending is being done productively (i'm not saying it is), that's the way it should be. Perhaps it's a philosophical or moral stance, but money shouldn't by itself be able to grow in value without being put into economic use. Taking it out of the system and squatting on it shouldn't give the hoarder any benefit. Similarly to why the government should be able to claim eminent domain on property that could be put to better use for the publics interest.
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Re: Gold ETF "Guarantee"

Post by raven15 »

I always thought they had done backtesting and found 2% inflation gave the best growth characteristics. 2% inflation implies that a small amount of liquidity is consistently being added to the system, which greases the wheels and keeps the money flowing to all the people who need it. With a gold based system, sometimes there just isn't enough money to go around and things dry up and stop.

I will mention Dalio's "Big Debt Crises" again. It is a step by step examination of dozens of examples in history where liquidity dried up, for both hard and fiat currencies.
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Re: Gold ETF "Guarantee"

Post by motorcyclesarecool »

sabtastic wrote: Sat Jan 19, 2019 11:20 pm
JoMoney wrote: Sat Jan 19, 2019 2:37 pm
sabtastic wrote: Sat Jan 19, 2019 10:30 am...This is why a commodity based currency is so important instead of a fiat based currency. There would be no need for speculation if you were confident your cash would hold value over time. There should be no need to have faith in the polices of a central bank.
Not having a commodity based currency is important. Commodities are vulnerable to the market being cornered and manipulated to nefarious ends. It unnecessarily restricts economic activity to the availability of some commodity and elevates the value of that commodity that may have other more useful purposes, along with the time spent from people seeking it out. Fiat currencies have issues, but shiny rocks shouldn't be held in such high esteem either.

FWIW, Cowry Shells are the oldest and mostly widely used form of money
https://en.wikipedia.org/wiki/Shell_money
I will refute you with one question. Say you open great grandma's hidden safe lost since 1913. Would you rather find cowry shells, ounces of gold or $20 bills?
Since we’re playing “what if” 100 year bearer bonds issued by what is now CSX.

In all seriousness, I think the biggest worldview disagreement here is on the definition of money. Those who see money as a method to store value are going to tend to be favorable to some form of specie, be it gold, silver, or whatever.

Money is primarily a method to transmit and receive value in an efficient manner. At first, barter was the only way to do this. Then came shells and coinage of specie. Anything that is reasonably compact could be used as money. In my dorm, packages of ramen noodles functioned as an ersatz currency. In prisons, it was not unheard of for cigarettes to function this way. A likely apocryphal news story held that Bernie Madoff had cornered the market in Swiss Miss Hot Chocolate at FCI Butner. Whatever it is that we use, money is how we transmit and receive value.

The leading miners of gold these days are South Africa, China, North Korea, and Russia. Would we want the value of our currency to be swung heavily by a foreign power?

All the gold mined in the history of humankind is less than the US GDP for a single year. I see no way that the economy could work if we limited the size of our money supply to the amount of gold in our vaults and reserves. If an economy is an engine, money is the lubricant oil. A bigger engine will require a larger oil supply or it will seize up. Right now there’s just not enough gold to account for all the value that changes hands in our global economy.

Many “gold as money” advocates will say they merely want a gold peg, not 100% gold backing of our currency. Which is basically fiat currency by another name.

Gold is a decent speculative store of value. The ETFs appear to be a convenient, affordable way to speculate on the price of gold. I don’t know if they’re sustainable long term. Perhaps if they engaged in securities lending they would be.

In a CHTF scenario, I doubt I’d be slicing off slivers of maple leafs, eagles, or krugerrands to buy a loaf of bread. Far more likely would be a return to barter. Fresh vegetables, drinkable water, liquor, gasoline, and bullets would probably serve me better while bartering in a “collapse of society” scenario.
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Re: Gold ETF "Guarantee"

Post by willthrill81 »

motorcyclesarecool wrote: Sun Jan 20, 2019 5:49 amIn a CHTF scenario, I doubt I’d be slicing off slivers of maple leafs, eagles, or krugerrands to buy a loaf of bread. Far more likely would be a return to barter. Fresh vegetables, drinkable water, liquor, gasoline, and bullets would probably serve me better while bartering in a “collapse of society” scenario.
Someone serious about preparing for that kind of scenario would store the needed water, food, etc. in addition to gold, silver, etc. Consumables and gold are not mutually exclusive.
Last edited by willthrill81 on Sun Jan 20, 2019 11:33 am, edited 1 time in total.
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Re: Gold ETF "Guarantee"

Post by linenfort »

All Seasons wrote: Fri Jan 18, 2019 4:29 pm ...
People often lament that gold's value is only "cultural" or something along those lines.

That's actually gold's strength. Unlike the dollar, it's not valuable just because some authority arbitrarily declares it so.

Gold is valuable because the market, beyond any central authority, has determined that it's valuable.
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Re: Gold ETF "Guarantee"

Post by CULater »

Investment managers such as Dalio (All Weather Fund), and George Soros own and trade very large gold positions as I understand it. In what form do they invest in gold? Seems unlikely they deal in physical gold but rather own shares of gold ETFs. I doubt that they are Armageddon investors - they hold gold as a trading asset. That seems good enough for me. But if I wanted or needed to hedge against Armageddon I might consider a holding of physical gold as well. I think we need to separate the two purposes of gold investment to determine how to own it.
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Re: Gold ETF "Guarantee"

Post by boglerdude »

> Right now there’s just not enough gold to account for all the value that changes hands in our global economy.

Not sure about this, the gold/bitcoin just goes up in value. With a deflationary currency you get a risk free return by burying it in your basement, so banks have to offer you high rates, then pass them to consumers. Perhaps rates so high that some would be reduced to barter if they cant afford gold/bitcoin? (Anyone can private message me if they can expand on this, but consider the comments too "political")
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Re: Gold ETF "Guarantee"

Post by sabtastic »

boglerdude wrote: Mon Jan 21, 2019 2:04 am > Right now there’s just not enough gold to account for all the value that changes hands in our global economy.

Not sure about this, the gold/bitcoin just goes up in value. With a deflationary currency you get a risk free return by burying it in your basement, so banks have to offer you high rates, then pass them to consumers. Perhaps rates so high that some would be reduced to barter if they cant afford gold/bitcoin? (Anyone can private message me if they can expand on this, but consider the comments too "political")
Not too political (i think), just off topic. I'm going to bite because I am a monetarist at heart and I think this kind of thing is fun...

In a free market, when a commodity is chosen as a currency by the market its value is determined exactly by (and only by) what others would trade for it. Today, if we were to choose gold or bitcoin as a commodity standard it therefore must be at the market price for the commodity - i.e 1280 dollars per oz for gold or 3500 for bitcoin. There is no concern regarding the amount of the commodity or that there will not be enough to go around. As long as there is no manipulation of the market value the currency will serve its purpose (i.e. as a store of value or work done). The notion that there needs to be new money created in order to "grease the wheels" or to "make sure there is enough to go around" is a fallacy. For example, if the amount of everyone's dollars instantly doubled, would we all be more wealthy? No, the value of the currency would drop by half. It is the same story if all dollars halved overnight. Value, and not quantity, determines the purchasing power of a currency.

Where things get into trouble is what happened to Britain after WW1 and the United States after WW2, where those respective countries tried to go back to the previously established standard after inflating the currency to pay for wartime spending. For example, if the united states tried to go back to a $20 an oz gold standard there would be a huge run on the treasury as everyone would be demanding an oz of gold for their twenty dollar bill as the market price is 60x more. Despite massive political pressure on individuals and other countries these flawed polices essentially bankrupted both of these countries and forced them off the gold standard and onto fiat currency within a few decades.

As for interest rates if currency is a store of wealth, the interest rate would be much simpler to calculate. Essentially you would be paying an individual or bank for time preference (i.e to forgo use of their stored wealth for a period of time). This would compete for others who would also offer similar services so the interest rate would simply be the amount of capital available on the market, the credit worthiness of the individual and the length of time the capital is needed. If savings are high, interest rates would be low. If savings are low, interest rates would be higher. Exactly in the same as if you would be renting any other capital good like an apartment. This allows entrepreneurs and others who regularly borrow capital to produce products to accurately anticipate demand. Artificially imposing lower or higher interest rates (just like artificially imposing artificial apartment rents) distorts the market and leads to instability, hording, etc and if you follow austrian economic theory, this is the cause of the dreaded business cycle.

Lastly, there is no worry that one person or country would horde all the commodity or gold mines. Remember, to obtain the currency, value or work needs to be added. So, if a hostile person or country attempted to purchase all the gold or owned all the gold mines that person or country would need to perform work or otherwise trade value to obtain it. It would be the same as someone attempting to purchase all of the world's real estate or all of the world's cars, etc. As the commodity becomes more scarce the market value increases and therefore makes it nearly impossible to monopolize the market. I should add here that this hypothetical example occurs in a free market. In a non-free market where things like executive order 6102 can occur, all bets are off.
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Re: Gold ETF "Guarantee"

Post by TVD »

Call_Me_Op wrote: Fri Jan 18, 2019 9:37 am As a correlate to the recent post on Jack Bogle recommending a small allocation to gold for a long-term portfolio, I started to wonder about holding gold in ETF form and whether there are any assurances that (in a time of crisis) an ETF holder (of GLD, for example) can liquidate his or her gold position at close to the spot price of gold. Any thoughts on this?
I pretty much assume that any of the ETN/ETFs are just speculating on gold's price rather than actual ownership of gold. I have looked at the prospectus of many of these and it always seems that there are caveats to these "promises" to exchange your account for physical gold (if my memory serves me correctly). Either you have to be an authorized participant or you can only withdraw the amount equivalent to a good delivery bar (i.e. ~400 oz increments) or something else that isn't feasible. This isn't going to be feasible for the average joe. If you have enough money to buy a good delivery bar, then what is the point of putting that in an ETF, etc. At that point, you are probably savy enough (and rich enough) to buy the actual thing and secure a good 3rd party storage facility. Maybe I missed one.

Another problem is that if gold starts going parabolic, these derivative products will only be able to cash you out and, given the time for authorization of fund transfers, etc, it will be likely you can't even get an adequate return on your investment. That being said, if gold does start going parabolic, there are probably serious badness happening. And gold may not even be that useful during part of that time because current forms won't be easily divisible to buy life's necessities. I mean at the moment it is the most sought after, 1 oz of gold will buy enough rolls of toilet paper to last your grandchildren's lifetimes, when you only needed a few months supply.
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Re: Gold ETF "Guarantee"

Post by willthrill81 »

TVD wrote: Mon Jan 21, 2019 2:47 pm
Call_Me_Op wrote: Fri Jan 18, 2019 9:37 am As a correlate to the recent post on Jack Bogle recommending a small allocation to gold for a long-term portfolio, I started to wonder about holding gold in ETF form and whether there are any assurances that (in a time of crisis) an ETF holder (of GLD, for example) can liquidate his or her gold position at close to the spot price of gold. Any thoughts on this?
I pretty much assume that any of the ETN/ETFs are just speculating on gold's price rather than actual ownership of gold. I have looked at the prospectus of many of these and it always seems that there are caveats to these "promises" to exchange your account for physical gold (if my memory serves me correctly). Either you have to be an authorized participant or you can only withdraw the amount equivalent to a good delivery bar (i.e. ~400 oz increments) or something else that isn't feasible. This isn't going to be feasible for the average joe. If you have enough money to buy a good delivery bar, then what is the point of putting that in an ETF, etc. At that point, you are probably savy enough (and rich enough) to buy the actual thing and secure a good 3rd party storage facility. Maybe I missed one.

Another problem is that if gold starts going parabolic, these derivative products will only be able to cash you out and, given the time for authorization of fund transfers, etc, it will be likely you can't even get an adequate return on your investment. That being said, if gold does start going parabolic, there are probably serious badness happening. And gold may not even be that useful during part of that time because current forms won't be easily divisible to buy life's necessities. I mean at the moment it is the most sought after, 1 oz of gold will buy enough rolls of toilet paper to last your grandchildren's lifetimes, when you only needed a few months supply.
Given the fact that there was uncertainty about everything, including the financial system itself, during the financial crisis of a decade ago, I wouldn't bet on an ETF with no redemption value for physical gold holding up.

In order to minimize the transaction costs of physical gold, you could implement Bogle's 5% recommendation by simply never selling your gold. If you fell below 5%, you would buy enough to come back up to that level, but you wouldn't sell if your holdings rose above the 5% mark. Considering the long-term history of gold, it would have historically naturally come back to 5% over time anyway. This is more or less what we intend to do once we're free of debt.
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Re: Gold ETF "Guarantee"

Post by bluquark »

sabtastic wrote: Mon Jan 21, 2019 10:19 am In a free market, when a commodity is chosen as a currency by the market its value is determined exactly by (and only by) what others would trade for it. Today, if we were to choose gold or bitcoin as a commodity standard it therefore must be at the market price for the commodity - i.e 1280 dollars per oz for gold or 3500 for bitcoin. There is no concern regarding the amount of the commodity or that there will not be enough to go around. As long as there is no manipulation of the market value the currency will serve its purpose (i.e. as a store of value or work done). The notion that there needs to be new money created in order to "grease the wheels" or to "make sure there is enough to go around" is a fallacy. For example, if the amount of everyone's dollars instantly doubled, would we all be more wealthy? No, the value of the currency would drop by half. It is the same story if all dollars halved overnight. Value, and not quantity, determines the purchasing power of a currency.

[...]

As for interest rates if currency is a store of wealth, the interest rate would be much simpler to calculate. Essentially you would be paying an individual or bank for time preference (i.e to forgo use of their stored wealth for a period of time). This would compete for others who would also offer similar services so the interest rate would simply be the amount of capital available on the market, the credit worthiness of the individual and the length of time the capital is needed. If savings are high, interest rates would be low. If savings are low, interest rates would be higher.
I agree with part of this, but what's missing from your analysis is that lending creates money. As banks issue credit (or individual actors issue personal loans or securitized lending), it sooner or later comes back to them in the form of deposits from people who were indirectly paid by the people who received the loans, allowing them to issue even more credit. This process goes round and round and the amount of money in the economy increases even though the "sum of net worth" of all economic actors doesn't change (because assets and liabilities remain in balance). This process operates as a natural effect of the free market regardless of whether we have fiat money or gold-backed money (although it would not happen in a zero-trust physical gold coin economy).

So a statement like "the interest rate would simply be the amount of capital available on the market" is kind of weird because it's a dynamic process where low interest rates create even more capital. It's not a self-stabilizing system that reaches a natural balance.
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Re: Gold ETF "Guarantee"

Post by AlphaLess »

Phineas J. Whoopee wrote: Fri Jan 18, 2019 3:01 pm This information may be more basic than the question, but holding shares in a gold ETF does not entitle you to go to their door and receive physical gold in return for the shares, even if the ETF keeps all of it physical.
PJW
So this is only partially true.

If you are creating or redeeming, indeed you need to transact in actual gold bars. Here is the create / redeem process for GLD.

https://www.sec.gov/Archives/edgar/data ... 60dfwp.htm

So, if S.H.I.T were to happen, then theoretically, someone - not necessarily you - would be able to redeem ETF shares for gold, at a clip of 100K shares.

But a few things to remember about Gold ETFs:
- they charge expenses,
- there are storage costs,
- IRS would treat capital gains in the same category as antique / collectible.

At times of crisis, I think the following would have to happen:
- Gold prices is up, way up,
- ETF (e.g., GLD) is tracking the price of Gold well (thanks to authorized participants who are buying ETF, and redeeming for physical gold),
- you (retail investor) is able to trade the ETF,
- you can exit at a price that makes it worthwhile / meaningful.

The above mechanism is not unique to GLD. A number of other gold ETFs operate in a similar manner: (1) collection, storage, and attribution of gold, (2) create / redeem.
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Re: Gold ETF "Guarantee"

Post by AlphaLess »

For short term punting, you can also transact in CME (Chicago Mercantile Exchange) gold futures: https://www.cmegroup.com/trading/metals ... tions.html, ticker symbol: GC.

LME (London Metals Exchange) also has gold contracts:
https://www.lme.com/en-GB/Metals/Precio ... tabIndex=0
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Re: Gold ETF "Guarantee"

Post by Phineas J. Whoopee »

AlphaLess wrote: Mon Jan 21, 2019 4:28 pm
Phineas J. Whoopee wrote: Fri Jan 18, 2019 3:01 pm This information may be more basic than the question, but holding shares in a gold ETF does not entitle you to go to their door and receive physical gold in return for the shares, even if the ETF keeps all of it physical.
PJW
So this is only partially true.

If you are creating or redeeming, indeed you need to transact in actual gold bars. Here is the create / redeem process for GLD.

https://www.sec.gov/Archives/edgar/data ... 60dfwp.htm

So, if S.H.I.T were to happen, then theoretically, someone - not necessarily you - would be able to redeem ETF shares for gold, at a clip of 100K shares.

But a few things to remember about Gold ETFs:
- they charge expenses,
- there are storage costs,
- IRS would treat capital gains in the same category as antique / collectible.

At times of crisis, I think the following would have to happen:
- Gold prices is up, way up,
- ETF (e.g., GLD) is tracking the price of Gold well (thanks to authorized participants who are buying ETF, and redeeming for physical gold),
- you (retail investor) is able to trade the ETF,
- you can exit at a price that makes it worthwhile / meaningful.

The above mechanism is not unique to GLD. A number of other gold ETFs operate in a similar manner: (1) collection, storage, and attribution of gold, (2) create / redeem.
All ETFs behave in precisely that manner, not just some gold-holding ones. As your link says, one has to be certified in advance as an Authorized Participant, always an institution with a lifespan that transcends those of individuals, and frequently there is only one for a given ETF. There is a defined process, common to all ETFs, an electronic process, by which to buy and redeem, or stock up on the assets and then sell, shares of the ETF. Even when a good delivery bar changes hands it typically does not physically move. One cannot obtain the substance by showing up at the ETF's door, my example, and the AP process is meant to keep the ETF market value close to the value of the underlying assets. It relies on orderly markets. In an emergency it would break down.

Therefore my statement is not partially true, but completely true.

PJW
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Re: Gold ETF "Guarantee"

Post by AlphaLess »

Phineas J. Whoopee wrote: Mon Jan 21, 2019 4:53 pm
AlphaLess wrote: Mon Jan 21, 2019 4:28 pm
Phineas J. Whoopee wrote: Fri Jan 18, 2019 3:01 pm This information may be more basic than the question, but holding shares in a gold ETF does not entitle you to go to their door and receive physical gold in return for the shares, even if the ETF keeps all of it physical.
PJW
So this is only partially true.

If you are creating or redeeming, indeed you need to transact in actual gold bars. Here is the create / redeem process for GLD.

https://www.sec.gov/Archives/edgar/data ... 60dfwp.htm

So, if S.H.I.T were to happen, then theoretically, someone - not necessarily you - would be able to redeem ETF shares for gold, at a clip of 100K shares.

But a few things to remember about Gold ETFs:
- they charge expenses,
- there are storage costs,
- IRS would treat capital gains in the same category as antique / collectible.

At times of crisis, I think the following would have to happen:
- Gold prices is up, way up,
- ETF (e.g., GLD) is tracking the price of Gold well (thanks to authorized participants who are buying ETF, and redeeming for physical gold),
- you (retail investor) is able to trade the ETF,
- you can exit at a price that makes it worthwhile / meaningful.

The above mechanism is not unique to GLD. A number of other gold ETFs operate in a similar manner: (1) collection, storage, and attribution of gold, (2) create / redeem.
All ETFs behave in precisely that manner, not just some gold-holding ones. As your link says, one has to be certified in advance as an Authorized Participant, always an institution with a lifespan that transcends those of individuals, and frequently there is only one for a given ETF. There is a defined process, common to all ETFs, an electronic process, by which to buy and redeem, or stock up on the assets and then sell, shares of the ETF. Even when a good delivery bar changes hands it typically does not physically move. One cannot obtain the substance by showing up at the ETF's door, my example, and the AP process is meant to keep the ETF market value close to the value of the underlying assets. It relies on orderly markets. In an emergency it would break down.

Therefore my statement is not partially true, but completely true.

PJW
Thanks for the explanation, mate.

I work for a company that is an authorized ETF participants, doing create-redeems all day long.

I was merely stating that what you said in your original post is not true.

I would say that the spirit of your original statement is 100% NOT TRUE.

Once the gold is yours, it is yours.

You may feel free to move it to your hearts desire: you can even put it on a space shuttle and send it to the edges of the milky way.

But to be sure: that gold is yours, once you redeem the ETF shares.
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Re: Gold ETF "Guarantee"

Post by AlphaLess »

Phineas J. Whoopee wrote: Mon Jan 21, 2019 4:53 pm Authorized Participant, always an institution with a lifespan that transcends those of individuals, and frequently there is only one for a given ETF.
That is a GROSS exaggeration.

Most of the ETF authorized participants did not exist when I was born. And I am very young. And some of them went belly-up. Some of the ones on the list there 'inherited' their so-called authorized status from those that went belly up.

This lesson is tuition free: https://uk.spdrs.com/library-content/pu ... ipants.pdf?
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