Everything You Need To Know About The Largest Gold ETF
By: Bob Pisani | CNBC "On-Air Stocks" Editor
While there are several gold exchange-traded products available, the SPDR Gold Trust, with over $60 billion in assets, is far and away the largest.
The second-largest gold ETF, the iShares Comex Gold Trust, has less than $8 billion in assets.
I get the most questions about the GLD, so I will confine myself to that product. Here are the answers to frequently asked questions.
Who owns the GLD?
The sponsor (creator) of thetrust is World Gold Trust Services, which is wholly owned by the World Gold Council. It, in turn, hired a trustee, Bank of New York Mellon Asset Servicing (a division of Bank of New York) that is responsible for the day-to-day administration of the trust. The trustee establishes the daily Net Asset Value (NAV)for each share. The NAV is the value of the assets, less the liabilities, on a per-share basis.
The marketing agent for the SPDR Gold Trust ETF is State Street Global Markets.
What do I own when I buy the GLD?
You own a fractional, undivided beneficial ownership interest in a trust, the sole assets of which are gold bullion and, from time to time, cash. You are a shareholder, but the prospectus clearly states you have no right to elect directors or receive dividends.
You do not directly own the underlying asset, nor can you take possession of physical gold. For some, that is a disadvantage.
"If you don't have it in my hand, it's not worth it," I've heard some say. If you feel that way, these type of gold investments are not for you. You are better off owning bullion directly or through some other medium that allows you to exchange shares directly for gold.
The stated investment objective of the gold trust is for the shares to reflect the performance of the price of gold bullion, less the trust's expenses.
Fair enough — but if you can't actually redeem your shares for physical gold, what is the advantage?
The big advantage of this type of investment: It is backed by bullion, even if you cannot take physical possession. For most, it's a convenient and cost-effective way to gain indirect access to gold. The shares can be bought and sold each day the stock market is open, and for many the cost of owning the trustmay be far lower than physically owning gold.
OK, so when you invest in the GLD you have an ownership interest in a Trust, which owns gold. Where is the gold, and who looks after it?
That is the job of the custodian. In the case of this ETF, the custodian is HSBC . The firm is responsible for safekeeping of the bars.
The custodian is required to hold an amount of gold equal to the assets of the trust. The website maintained by the marketing agent (State Street) states the value of the gold held in trust every day. On Aug. 3, 2011, for example, there was was 1,281.75 metric tons of gold held (41.2 million ounces), with a value of about $67.4 billion.
Where is the gold?
In the case of the GLD, in a vault in London, although the prospectus indicates there may be periods of time when some gold is held by subcustodians elsewhere. I recently visited this vault as part of our series on gold.
How do I know that all the gold is present?
There is a gold bar list that is published on a daily basis.
HSBCis required to notify Bank of New York every business day about the amount of bullion that is moved in and out of the allocated account. Every month HSBC also provides a weight list that identifies each bullion bar being held.
Twice a year the gold bars are independently counted, one consisting of a random sample count, the other a complete bar count. Here is the most recent certificate from the company that did the counting.
In addition, the Sponsor of the trust, theWorld Gold Trust, can also visit the vaults up to twice a year to inspect the gold. The most recent 10-K form of the ETF (November 2010) states: "The Trustee may, upon reasonable notice, visit the Custodian's premises up to twice a year and examine the Trust's gold held there and the Custodian's records concerning the Trust Allocated Account and the Trust Unallocated Account. The Trust's independent registered public accountant may also visit the Custodian's premises in connection with their audit of the financial statements of the Trust."
What's an allocated and an unallocated account?
Gold bullion is held mostly in vaults that are controlled by bullion banks. In practice, a small number of banks vault a large percentage of the world's bullion. They include HSBC, ScotiaMocatta, Deutsche Bank, JP Morgan, UBS, and Barclays .
These bullion banks all have relationships with each other. They move gold around between their accounts in accordance with their clients' wishes, and the banks themselves own gold as well.
How do you move the gold around and keep all the accounts straight?
You create allocated accounts.
An allocated account is a segregated account. In the case of the GLD, HSBC has an account in Bank of New York's name that holds uniquely identifiable gold bars, and segregates those bars from any other gold that they hold for other clients. The gold is owned outright by the Trust. It is not the property of the bank that is storing the gold, nor can it be used as part of a bank's reserve. The bank has no claim to it, they are merely a custodian — they are paid a fee to store the gold.
Unallocated accounts are used to move the gold from the accounts of the authorized participants (the brokerage firms that are authorized to create baskets) to and from the allocated account.
The difference between an allocated and unallocated account is that clients are not entitled to claim specific bars of gold, they only have a claim on the gold stock held by the dealer. Clients are technically unsecured creditors.
This sounds dangerous — why would tradershold gold in an unallocated account? Because it's easier and it facilities transfer of gold. It really is akin to a gold checking account. In your bank checking account, you do not have a claim on a specific dollar bill with a specific serial number. You have a claim on the supply of money held by the bank. Not having to check on the serial number of each dollar makes movement of money easier. It's the same with gold.