Everything You Need To Know About The Largest Gold ETF
CNBC "On-Air Stocks" Editor
More of your gold questions answered
The GLD gold is held in an allocated account. During a business day, gold may be transferred into or out of the allocated account via unallocated accounts. This is standard business practice for the movement of gold. However, at the end of each business day, all of the gold is held in an allocated account.
What is the relationship between shares in the GLD and the gold?
The trust holds gold and in exchange for deposits of gold issues shares. The shares are in minimum blocks of 100,000 shares (called baskets) and are distributed to authorized participants, mostly brokerage firms, who in turn distribute them to individual investors.
Since the price of the ETF is approximately one-tenth the price of an ounce of gold (accounting for management fees), 100,000 shares is 10,000 ounces of gold .
So in order to create 100,000 shares of the gold trust ETF, an authorized participant would have to deposit 10,000 ounces of gold from their unallocated account into the fund's unallocated account, which would then be transferred to the GLD's Allocated Account.
In the process of transferring, the Custodian allocates specific bars from the Unallocated Account to the Allocated Account.
The opposite happens when authorized participants redeem their shares: 10,000 shares are removed from the GLD Allocated Account, moved to the GLD unallocated account, then to the unallocated account of the authorized participant.
All of this is done according to rules established by the London Bullion Market Association.
Is any of the gold leased or loaned out?
No. Once again, the GLD is an allocated account — that is, the gold is owned outright by the trust. The GLD prospectus states that "Gold held in the Trust's allocated account is the property of the Trust and is not traded, leased or loaned under any circumstances."
Is the gold insured?
The trust itself does not have insurance. However, HSBC holds insurance "on such terms and conditions as we consider appropriate." The sponsor and the trustee have a right to review the insurance certificate. HSBC is responsible for any losses due to fraud, negligence or willful default.
What happens if there's a terrorist attack and the gold is unavailable or destroyed?
There is a standard force majeure clause in the agreement between HSBC and Bank of New York. They are not responsible for terrorist attacks, wars or acts of God.
This is not an academic question; there was a large gold vault at the World Trade Center that was buried on 9/11. The gold was eventually recovered but the bank holding the gold was able to continue operations as normal by borrowing gold from elsewhere.
Is there any reason I might want to own physical gold directly rather than through a gold exchange-traded product?
Sure. For some, the ability to take physical possession of gold is the most important consideration. They don't want anything—a trust, a custodian, anyone—to come between them and their gold.
For traders with large amounts of gold there may be other reasons as well.
Some may want to store their own gold, which may save money if they have a sufficiently large supply and can negotiate a deal with a vaulting facility. The fees they are charged for storage may be lower than the 0.4 percent expense ratio that the GLD charges.
Others subject to regulatory control may want to accumulate bullion privately.