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SPDR Gold Trust ETF

Surprise! A Close Look at GLD Reveals What it IS and is NOT



The most common misunderstandings regarding the primary gold ETF, SPDR Gold Trust (NYSE:GLD) is that it buys and sells gold. That is not the case. It is just a paper asset. It is not a way to buy gold and have someone else store your holdings for you. It is just an innovative way to “own gold.” [Below I outline more of just what GLD is andis not:]
So says Doug Hornig (Caseyresearch.com) in an article which Lorimer Wilson, editor of MunKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. Hornig goes on to say: The SPDR Gold Trust ETF burst upon the scene in November of 2004 and was immediately latched on to as a means of riding the gold bull market without the inconvenience of having to transport and securely store actual bullion. In the past seven years…it has steadily ascended the list of the world’s leading gold repositories, until today it has the sixth-largest global stash of the metal, at more than 1,230 tons, or 39.57 million ounces, worth over $70.7 billion.

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[Below I outline just what GLD is and is not:] 1. GLD shares are only paper assets It can’t be stressed enough that GLD is a paper asset. It is not a way to buy gold and have someone else store your holdings for you. What it does do is create and redeem paper shares in the company. These are passed through a group of market makers, who trade them on the NYSE, then deposit into, or withdraw from, the HSBC vault in London the corresponding amount of physical bullion, in the form of 400 oz. London Good Delivery bars… 2. GLD deals only in “baskets” of 100,000 shares Even the above description is somewhat misleading. GLD deals only in “baskets” of 100,000 shares, with the goal being for the share price to track gold’s market value as closely as possible. Since each share represents slightly less than a tenth of an ounce of gold, that means each basket must trade close to 10,000 ounces of gold – and that would be impractical if the buying and selling had to be done on the open market. 3. GLD gold existence can not be personally verified So how do they pull it off? Well, what actually happens is that the gold is moved either in to or out of the GLD-allocated section of HSBC’s vault, i.e. to or from another section of that same vault…Beyond that, we don’t know much, and you will not be allowed to see the vault, whether or not you are a GLD shareholder and no matter how many shares you own… 4. GLD shares are only valued at approx. 97.4% the price of gold bullion A GLD share will never be priced exactly at the value of a tenth of an ounce of metal, simply because the trust deducts transaction fees and other expenses, but it is close. During August of 2011, for example, the net asset value of a share of GLD varied from 97.3635 to 97.3867% of the gold price, as fixed each day at 10:30 a.m. New York time. 5. GLD shares are not redeemable in physical gold It is true that, theoretically, you can convert your GLD shares to physical gold and take delivery of it but, in practice, you can’t because:
  • you have to be approved to do so (generally meaning, you’re either a broker or a market maker), and then
  • you have to redeem a minimum of 100,000 shares and even then, even if you meet those qualifications,
  • they have the option of redeeming such shares in cash equivalent rather than bullion.
In other words, if there were a sudden run on physical gold, GLD is not contractually obligated to provide actual metal, in exchange for however many shares, to anyone. [Given the above,] our position has always been to hold as much gold in coins and bullion as you comfortably can and use the ETFs to generate profits if you like, but make sure you realize that all of those profits will be of the paper variety. 6. GLD share profits (long-term) are taxed at 28% Furthermore, there is the little matter of taxation…GLD shares, although they trade like stock, are not stocks in the same sense as Apple (AAPL) shares, [for example.]. Not when the taxman cometh. If you buy shares of Apple and hold them long term, for more than a year, then sell them, you are taxed at the prevailing capital gains rate, currently 15%. Gold, however, is considered a “collectible.” If you buy gold coins, for example, and hold them long term, then sell them, your tax liability is at the rate for collectibles, presently 28%. If you sell them for a short-term profit, you’re liable for taxes at the same rate as for ordinary income, which is determined by whatever bracket you’re in. Of course, GLD shares are not gold, as I’ve just taken some pains to point out. Ah, but here’s the rub. GLD is structured as a grantor trust, not a mutual fund. A grantor trust is ignored for tax purposes so that the investor is treated as owning a pro-rata share of the underlying holdings, not the entity as it exists on paper. That is to say, if GLD were a mutual fund, shares would be taxed at the normal capital gains rate, but because it is a grantor trust, its long-term gains are taxed at the applicable rate for the gold it holds … which is 28%. This situation leads to some rather odd tax peculiarities. Say your ordinary income is in the 25% tax bracket. You’re actually better off selling GLD shares short term than you would be if you held them long term and got pushed into a 28% liability. 7. GLD is an innovative way to participate in gold “ownership” For ordinary investors GLD represents a way to (indirectly) participate in gold “ownership” without the hassle of actually taking physical delivery and finding a suitable place to vault your metal. Plus, there are no storage fees, bid/ask spreads, threats of theft, or dealer markups to worry about. 8. GLD shares allow one to play the market Finally, for those who like to really play the market, GLD shares are amenable to all the tricks of the securities trade. They can be optioned, shorted, hedged, bundled, margined, whatever. Little wonder GLD is so wildly popular. Conclusion Use GLD if you are of a mind to. Just be certain you understand what it is you are dealing with. Related Articles: 1. All Gold and Silver ETFs are NOT Created Equal! Here’s the Best Whole oceans of ink have been spilled detailing the good and not-so-good points of the closed-end fund CEF (Central Fund of Canada) and the twin ETF’s GLD (SPDR Gold Trust) and SLV (iShares Silver Trust) funds. My goal here is to distill the salient points down to the fewest words possible to help make your due diligence task somewhat less…well…tasking. [Let's go!] 2. Gold Bullion ETFs: A Primer The label “gold bug” may suggest a kooky old man who spends a lot of time in his basement reading conspiracy theory newsletters. The truth, however, is that there are many legitimate reasons to trade in gold and its derivatives. Gold has been proven time and time again to be an excellent “safe haven” investment, a holding that will appreciate in value during times of economic uncertainty. As such, gold may offer some valuable hedging and diversification benefits for a long-term portfolio. 3. Why GLD Is My Choice Over Every Other Stock and ETF Investors are looking for a safe place to put their money – an asset class they can “touch” and possibly trade even when no organized marketplace exists. That of course is the worst-case scenario and I do not believe it will get that far but the possibility is there and gold seems to achieve peace of mind for investors at the moment. As such, for me, GLD would be the only stock or ETF I would buy if I could own just one.


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Lorimer Wilson -- Bio and Archives

<em>Lorimer Wilson is the Editor of munKNEE.com

Lorimer is also a writer, analyst and commentator on the economic, financial and investment environment around the world and has recently been identified as the 12th most-read such writer on the internet out of over 500 frequent contributors.

His articles are unique, insightful, informative, instructive and well researched analyses of the economy and marketplace and posted regularly on more than 50 financial sites at the present time.

Lorimer also is an accomplished editor posting edited excerpts of other author’s articles on his site to provide his visitors with a fast and easy read of some of the best articles to be found on the internet on any given day.

His editorial skills are available for hire should you have an article, book or other written material that needs to be fine-tuned before publication. </a>


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