The Truth Behind GLD

Dr. Rusty McDougal first warned me about GLD last year. (GLD is the exchange-traded fund that uses shareholder money to buy an equivalent amount of gold, minus expenses.) Rusty is a gold bug. But he doesn’t like GLD. He doesn’t think it has the gold it claims to have. And he says it’s in cahoots with the big banks and gold traders who manipulate gold prices.

“If you want gold, why would you buy ‘paper gold’?” he asked me.

I’m going to answer that question here. (And it’s probably not what you expect.)

But first… confession time. I own gold, but I’m no gold bug. I’ve never invested in GLD. But I’ve always liked the idea behind it: It provides a way to own gold without the hassles of storing it, transporting it, and keeping it secure.

After talking to Rusty, I did a little research. And I quickly found out that his opinion of GLD is shared by many other gold followers. GLD, they say, is also guilty of many other sins Rusty didn’t mention. They don’t insure their gold. They don’t keep track of their gold. They don’t audit their gold. They allow their gold (bought by GLD shareholders) to be leased by their gold “handlers.” And they operate behind closed doors.

You’re getting the picture, right? The bottom line? Many folks think that GLD cannot be trusted. And it certainly doesn’t deserve your money.

But if GLD is playing games with its customers, it’s the best-run scam I’ve ever come across. Either that or it is what it says it is: a convenient way to invest in gold if you don’t mind never seeing or touching the metal you’re buying.

Sorry, but I’m not buying into the idea that GLD, together with the big banks, is bilking investors out of their hard-earned cash. First off, everyone and his mother would have to be in on the conspiracy. (Here’s the short list: GLD, HSBC Bank, Federal Reserve Bank of New York, Federal Deposit Insurance Corporation, UK Financial Services Authority, London Bullion Market Association (LBMA), Bank of England, Brinks Ltd., Citigroup, Goldman Sachs, J.P. Morgan, UBS Securities, Morgan Stanley & Co., and Deloitte & Touche.) And that just doesn’t make sense.

Surely there are easier ways to manipulate the price of gold than to prop up one of the biggest and best known ETFs by falsifying dozens of documents, don’t you think?

But I have a bigger problem with the case against GLD.

False Accusations

The accusations simply do NOT hold up.

Except for one, that is – and it’s something that GLD readily admits…

The say, upfront, that they won’t deal with you directly if you want to exchange your shares for gold. You have to do it through your broker.

So buying GLD shares isn’t the same as buying gold. If that’s a deal breaker for you, you don’t have to read any further. You know all you need to know about GLD.

But if you’re still interested, the question remains, is it worth investing in GLD?

I say absolutely yes. Because you get two big benefits.

For openers, you get to jump off the dollar-debasement train. President Nixon took us off the gold standard in 1971. And if you want to go back to the good ol’ pre-Nixon days of a gold-backed currency, there’s really only one way to do it. Buy GLD shares. They’re fully backed by gold. While the dollar goes down, your shares of GLD go up right in step with gold…

  • 6 months +13.29% (London spot price +13.52%)
  • 1 year +22.56% (London spot price +23.04%)
  • Since inception (to month end) +18.91% (London spot price +19.38%)

The other benefit?

GLD gives you a nice hedge against stock market drops. It often goes in the opposite direction. Take a look…

In 2005, Stock Market Stays Near Zero While GLD Soars Over 30%
(The blue line is the GLD. The red line is the S&P)

In 2006, Stock Market Flat While GLD Surges Over 45%

In 2007, Stock Market Falls 10% While GLD Makes 40%

In 2008, Stock Market Plunges Almost 40% While GLD Gains Over 10%

In 2009, the Markets Were Flat While GLD Made Almost 10%

In 2010, the Markets Dropped Below Zero While GLD Gained 20%

As I said, GLD’s purported shortcomings do NOT hold up under close scrutiny. After poring over GLD’s prospectus and the dozens of documents on its website, and asking some hard questions of GLD’s Brian M., this is what I’ve learned:

  • Quality of Gold? Not an issue. GLD’s custodian, HSBC, must hold gold “at least a minimum fineness (or purity) of 995 parts per 1,000 (99.5%) and otherwise conform to the rules, regulations, practices, and customs of the LBMA, including the specifications for a London Good Delivery Bar. A London Good Delivery Bar must also bear the stamp of one of the melters and assayers who are on the LBMA approved list.”
  • No Auditing? No way. GLD’s trustee, New York Mellon Bank, audits GLD’s gold holdings in London twice a year. Plus, Deloitte & Touche, GLD’s financial auditor, visits the vaults before signing off on its annual audits.
  • Zero Transparency? Not true. GLD has a very cool website. It updates its gold ounce count on a daily basis and its list of gold bars, with the bar codes individually listed, is updated every Friday. FYI, on February 11, GLD had 39,430,988.237 ounces. Click here for the latest figures:
  • Unauthorized Gold Leasing? No opportunity to do it. All of GLD’s gold is allocated to specific accounts except when it’s being transferred in and out of the trust. Or when small amounts of gold (can’t be more than 430 ounces) are left over at the end of the day. The opportunity for the fund’s gold handlers to lease this gold is extremely limited. What’s more, HSBC updates its records at the end of each business day to identify the specific bars of gold allocated to GLD and details all the gold transfers in and out of GLD.
  • Illegal Fractional Banking? Simply not true. The value of GLD’s gold as of last Friday is $53,823,000 (39,430,988.237 ounces x $1,365.00 per ounce). The value of their total shares is $53,818,000 (404.10 million shares x $133.18 per share).

When it comes to GLD, the naysayers have an overactive imagination. But their criticisms are not just exaggerated. They have no factual basis. They’re right on only one point. You can’t redeem gold for the underlying bullion GLD holds. But that’s nothing new in the ETF world. It’s how ETFs are constructed. Go ahead and try to redeem your DIAMONDS shares for the underlying Dow Jones stocks. You can’t, of course.

So if you hanker after physical gold, GLD is not for you.

But the rest of you need to know that GLD is no scam. In fact, it’s a solidly constructed and well-run ETF. And it’s as transparent as, if not more transparent than, any other ETF I know.

You have a choice. You could wait for the government to put our shaky currency back on the gold standard. (And you will be waiting a very, very long time.) Or you could trade in your degrading dollars right now for GLD paper fully backed by gold. If you would trust a gold-backed dollar, you should be able to trust GLD. That’s what GLD is, a “gold-backed currency” writ small.

Bottom line? GLD can be trusted. And it has done everything it can to deserve your hard-earned money.

The price of gold is heading up. Isn’t it nice to know that you have a hassle-free, safe, and effective way to take advantage of that?