GLD – SPDR Gold Shares vs. Physical Gold

by JDH on December 24, 2011

What’s better: paper gold, like GLD – SPDR Gold Trust Shares, or physical gold?

On the surface, the question is relatively simple. The SPDR GLD Trust holds over 40 million ounces of gold, so by buying GLD you are buying paper backed by physical gold. The advantage of paper gold is that it’s very easy to trade. I can buy it this morning and sell it this afternoon. I have no worries about storage, transportation, fabrication or assay fees. It’s easy.

The risk of paper gold is that the gold is not really there when you want to sell it. With physical precious metals, in your possession, you know you’ve got it. You can touch it and see it. Selling it, of course, is more cumbersome, since you have to store it, transport it, insure it, and hope it doesn’t get stolen.

That’s the simple summary of your decision. But is there more to it than that? Is there a moral component to this decision? Let’s take a walk into story time with JDH, shall we?

Let’s say that you were a big government; we’ll call it USA, (but this is entirely hypothetical).

You have spent beyond your means for decades. That was fine, because to spend more, you only needed to print more money. But eventually the world began to realize that paper money had no real value, so the investors of the world gradually started replacing their paper dollars with hard assets. They started buying assets like precious metals, which can’t be printed.

As a result, the price of gold increased, from $300 in the year 2000, to over $1,600 today.

That’s a problem, because if everyone realizes that gold is going up because paper money is worthless, no-one will want paper money; everyone will want gold.

If no-one wants paper money, how will the government be able to print paper to keep spending beyond their means?

The government needs a way to keep the price of precious metals down, so that people don’t realize that paper money has no value. If gold keeps going up every year, it becomes a self-fulfilling prophecy, and more people will buy gold, which makes the price keep going up.

If people convert their dollars to gold, by buying gold, that makes the price of gold go up and the value of dollars go down. That’s bad, if you’re the government.

Governments need to be able to print dollars, but everyone wants gold, because it can’t be printed.

Or can it?

What the government really needs is a way to print gold.

Of course you can’t print gold, but what you could do is issue gold certificates. You start a big gold fund (let’s call it GLD, but again, this is just a hypothetical discussion), and you raise money, and use it to buy gold. In theory, you could issue as many certificates as you want, even if they aren’t backed by gold.

Cool, eh?

You tell everyone that their piece of paper is backed by gold, even if it isn’t. That way you can print as many pieces of paper as you want, and keep on spending. Sweet.

But it gets better. You don’t want people buying physical gold with their dollars, because that drives up the price of gold. Now people who think they want to invest in gold can buy gold pieces of paper, which diverts money from real gold to paper gold.


If I invented this hypothetical thing called GLD, on my website I’d have a page that says “GLD is great; you can buy gold, without the hassle of having to store it, or insure it, or transport it; you get the best of both worlds; the security of physical, with the convenience of paper.”

So now, people who want gold, instead of buying gold mining shares, which are risky, and instead of buying physical metal, which is cumbersome, can buy GLD.

Of course this means that, relative to physical precious metals, precious metals mining shares will start to drop. Why invest in shares when you can invest in GLD paper?

So we have had the perverse result this year where gold is up 14%, but mining shares are down.

Of course there are risks with mining shares. If you operate in a place like Africa, there’s a chance the government will decide to raise taxes, or just take your mine.

If you multiply the number of ounces in GLD’s vaults by the price of gold, you get about: $64,820,248,017

That’s $64 billion dollars of the shiny stuff.

So that means there’s $64 billion of gold sitting in the vaults, right?

Yes, sort of.

Three problems:

First, the custodians of GLD – SPDR Gold Trust Shares are JP Morgan and HSBC. Yup, the same guys who have allegedly been manipulating the market for years now. Do you really want the alleged manipulators holding the combination to the safe? Can you really trust them not to do something un-toward?

Second, it does not appear that the physical metal is ensured. A competitor, CEF.A.TO – Central Fund of Canada, carries insurance on it’s gold. That makes sense. What if my vault gets hit by an asteroid, or crushed in an earthquake? Insurance seems like a prudent precaution to take.

Third, GLD leases out it’s gold. I’ll let you do your own research on that concept, since it’s very difficult to find any concrete information on that subject. (Post your comments below if you can add more to the discussion).

If there are lease arrangements in place, you have significant counter-party risk.

And that’s really the point. Precious metals are, ultimately, an insurance policy. If the dollar crashes, you want to have some of your wealth in something that won’t lose it’s value. I personally recommend holding tangible assets like a shovel, to use for gardening, and some land, to garden on. Gold and silver are another asset class; they aren’t as practical as a shovel, but they should help retain some of your wealth. If the world as we know it ends, do I want to have a fight with whomever I`ve leased my gold out to? Nope. I want it physically in my possession.

So, to conclude, if you are looking for ways to protect your future, I recommend:

  1. Avoid debt, so you don`t owe anyone anything;
  2. Have practical assets that you can use in an emergency (land, a shovel, some seeds, some food, a house, etc.)
  3. Physical gold and silver to use as a medium of exchange, and to preserve wealth
  4. And then, once you have all of the above, consider some paper assets, like mining shares, gold certificates, etc. They are easier to sell, but might not be there when you need them, so they aren`t the foundation of your wealth preservation plan. That`s why they are fourth on the list, not first.

When it comes to paper gold, I do own CEF.A.TO – Central Fund of Canada, and I don`t own GLD – SPDR Gold Trust Shares, for the reasons mentioned.

Of course the final decisions are up to you.

{ 3 comments… read them below or add one }

Peter518 December 24, 2011 at 1:08 pm

The problem with CEF.A.TO is that it underperforms to GLD.

PaidInGold December 24, 2011 at 9:17 pm

I am terrible at trading paper I’ve found out…

Great article once again, JDH.

Merry Christmas!

PaidInGold December 24, 2011 at 9:18 pm

Gotta love how the article is hypothetical too!