Concerned About ETFs? You Should Be
JULY 03, 2012
Exchange Traded Funds have recently emerged as one of Wall Street’s premier products, being heavily marketed as alternatives to tangible assets. These paper vehicles simply give investors price exposure, largely failing to provide insulation from broader economic risks such as defaults on exchanges, the bankruptcy of a trustee or a broker, or an outright currency collapse.
Within the last few years, precious metal ETFs like GLD and SLV, have amassed a market capitalization in the hundreds of billions of dollars, acquiring a disproportionate grasp over the trading of electronic gold and silver. These funds have diverted novice investor demand away from physical bullion and into these fee-generating scams.
Despite their popularity and large trading volume, these fund’s prospectuses are filled with exhaustive and vague legal terminology. While these funds may provide significant trading liquidity, its physical gold and or silver holdings remain questionable and un-audited.
Liabilities within prospectuses are tossed around the Trustees, the custodians, and the sponsor. ETFs, such as GLD and SLV, exempt themselves from providing evidence of their holdings. They fend off audits through the use of multiple sub-custodians, and even allow Trustees to lease their holdings.
A look into the GLD or SLV exposes a prospectus crawling with counter-party risk. Their prized liquidity is limited to market hours, a mere 6.5 trading hours, 5 days a week. ETF investors are further exposed to overnight risk, stock market closures, bank holidays, and financial market meltdowns that heavily cripple its liquidity claims. Thus, the continuous 24/7 liquidity of tangible bullion crushes GLD, SLV, and other paper ETFs or electronically traded counterparts.
The most understated yet significant risk within the ETF universe is the viable collapse of the electronic pricing mechanism. The violent selloffs of the last decade have forewarned of the meltdowns that result from pricing distortions in electronic markets. Being that much of the volume for these ETFs originates from high frequency algorithmic trading; hedge funds and leveraged institutional traders prey on individual investors through the use of disruptive price mechanisms.
Being that ETFs are particularly vulnerable to mis-pricing, their prospectuses remain infused with convoluted clauses allowing them to operate in spite of significant price divergences from their underlying assets. In other words, physical gold and silver bullion could go supernova in price and value, while exchange traded funds could deflate and or go bankrupt. Any investor with exposure to exchange traded funds should reexamine the underlying and inherent risks these vehicles have.
Physical investment grade gold bullion cannot go broke
We lie in the midst of a generational bull market for precious metals shadowed by significant economic and political uncertainties, the prominent and outperforming asset class is evident. The challenge to the investor given today’s world of electronic trading, lies in the acquisition of tangible assets, without settling for paper.
Gold and silver remain unmatched in their ability to insulate investors from poor monetary policies, imprudent fiscal measures and their inflationary consequences. Ownership of PHYSICAL gold is pivotal, as securitized products such as ETFs and leveraged funds have come to prey on ignorant investors who vaguely understand the implications of counter-party risk.
Exchange traded funds have been designed to funnel demand that would otherwise be directed to physical bullion, this enables a managed escalation of gold and silver prices. As central banks, and now even FDIC Commercial banks begin to acquire tangible metals, do not be misled into a faulty investment.
We are now living in an age where tangible counter-party proof assets are king. How will you partake in this current cycle and protect your wealth?
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