I'd like to hear an explanation of where security lies in holding ETFs. I hear they are in trusts, but why should anyone be trusted now? I certainly don't trust overseas bullion vaults.
We have never expressed a view that ETFs are secure (as far as holding metals for the long run is concerned). If you refer to our How to Buy Gold and Silver section, you'll unmistakably find two points among the cons of holding ETFs:
- The risk of having insufficient backing by gold
- Fund bankruptcy risk
Precisely because of these points, we give ETFs 3 out of 5 stars in the investment category. In the long run, the risk of ETFs going bankrupt and leaving you with nothing but paper and promises is NOT negligible. We've never, and still don't advocate using ETFs as long-term investments. They are better than some other ways, but their main advantage is how easy it is to trade the market using them.
In fact, in the trading category, we give ETFs full marks. They are a cost-effective vehicle for short-term trades. It's hardly conceivable that you would be able to take advantage of short-lived upswings or downswings by immediately buying or selling physical metals because of the transaction costs and time involved. So, while we think that your insurance and long-term investment capital is best covered by physical gold, we are of a view that for short-term trading ETFs or ETNs are one of the best ways to go.
Let's take a closer look at the following two facts:
- You should trade only with money you can afford to lose.
- Trades are usually short-lived.
Since the risk of your counterparty going bankrupt during a short-lived trade is much smaller than in the long run and you only speculate with the capital you can loose and use only small parts of that capital for a given trade, the risk of the fund defaulting is offset by the favorable characteristics of ETFs. Once again, this is only about trading and NOT about long-term investments. For more info on how we exactly suggest to structure your portfolio and which instruments are appropriate for long-term investments and which for trading, please refer to our essay on gold and silver portfolio structure.
Finally, not using overseas vaults at all, is not such a good idea, because you miss out on the benefits of geographical diversification. Holding on to physical gold as insurance is crucial, but only when it comes along with diversification. It's true that you can only feel the gold that's within your eyesight but holding all of your gold at home or near the place you live in may be a bad idea. First of all, despite your best efforts, you can always get robbed. Secondly, what if your country introduced some kind of capital controls and prohibits the possession of gold? People would always find a way to get around and buy and sell gold but this would entail a lot of stress and illegal activity. Breaking the law is not the way to go. Holding part of your physical gold and silver abroad in several different countries can help you avoid such a scenario. Even if a given government imposed a ban on gold, you'd still be covered by physical holdings abroad. Now, the probability of all these countries introducing unfavorable regulation on gold and silver is certainly lower. To end in a little bit lighter tone: could you imagine Switzerland imposing regulation preventing you from accessing your capital in one of its banks? As a matter of fact, they may even go the other way around.
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