A friend sent me a report on “problems/concerns with the GLD ETF as structured and asked me to comment. I said:
GLD is kind of in the same category of ETNs which are promissory notes of the investment house which is guaranteeing performance of the instrument. There are quite a few of those out there which i don’t include in the dB at all for the very reason that there is an extra degree of risk that’s unsettling.
GLD isn’t an ETN but it’s true that no one can validate the holdings of the contracts they hold. i consider ETF2 to be a short term trading system; if i were a fundamentalist with a macro economic opinion and was looking to hedge with gold long term, i wouldn’t use GLD; i’d pay the extra premium to own bullion outright or consider coins.
the worries about GLD have been floating around since day 1 of the ETF being fielded, for example in the goldbug groups on Yahoo where the conspiracy theorists argue that its really part of a shell game being played to manipulate the price of gold lower.
the problem with “conspiracy theorists” is that once in awhile they are right.
there is an argument that can also be made about what your belief in the real value of an ounce of gold in your hand in your possession is worth as well. It’s really a function of the strength of the social contract that respects the ownership of private property, and the willingness of someone else to accept a chunk of shiny metal in exchange for something else.
So, the onion skin sets of beliefs about the reality and value of trading instruments is pretty precarious the closer you look at it.
That said, I concur that GLD in particular, when compared to other more “normal” ETFs has special risks that are political and controversial in nature GLD right now trades about 1.6B dollars a day in dollar volume; my sense is that it follows the spot price rather than pushing the spot price around. The gold contracts are trading something like $20B a day right now
i’ll read the report to see what else it says; the research project into prospectus’ is massive; at the conclusion of it you could end up with something like levels of trust in the underlying assets of groups of ETFs, and modified by the soundness of the bank/brokerage offering the ETF.
There are some flat out sound heuristics already available for action like: no more than 10% of portfolio position in any single ETF, no use of ETNs whatsoever, maintain short term trading outlook, and after some research, perhaps exclude ETFs that trigger some kinds of alarms like GLD