ALL THAT GLITTERS IS NOT GOLD
There has been a lot of talk in the Singapore news about the danger of gold buy-back schemes and raids on companies offering such offers. We previously gave you ideas on how you can protect yourself from taken in by these schemes and invest your hardearned money with more legitimate precious metals dealers, and how to find them. The same Singapore news article suggests an alternative to holding physical gold and silver in the form of Exchange Traded Funds and how you can get involved in these paper assets. These funds are offered on the SGX and even the CPF allows you to invest your money in some of these funds. The news article itself gave a contrast and comparison between these funds with the buy-back schemes.
While we agree with the advice that you need to very careful in finding a credible vendor to purchase physical precious metals assets, there are also risks with these funds of which you need to be aware. ETFs guaranteed by banks are supposed to be more secure right? When you invest in a gold or silver Exchange Traded Funds or ETFs, you do not become the sole owner of the actual physical gold or silver. Fund managers contract with a custodian like a large, international bank, to hold the gold or silver in a vault. Most of the time, because the custodian is a huge multi-national corporation with thousands
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of accounts, when gold or silver is bought or sold, the metal never physically moves. Ownership to the bars of gold or silver is simply transferred from the seller to the buyer as an entry in a massive computer network.
This is where problems can arise: If the custodian is allowed to appoint sub-custodians, and the sub-custodians are allowed to appoint sub-sub-custodians and so on, the gold or silver is spread out over various geographic locations and multiple accounts. The only way to prove these sub-custodians hold enough gold or silver at any given point in time to fully back the accounts is for a full audit to be conducted at the end of trading hours everyday. If the gold ETF or silver ETF does not regularly require this type of audit of its custodian and sub-custodians, chances are high that the same physical gold may be purchased or owned by more than one individual at the same time. Many metals experts believe that silver ETFs and gold ETFs may hold less than the amount of precious metals they supposedly own or none at all. What’s worse, as is true of any electronic or paper form of wealth, the investor can be denied access to the value of his or her gold ETF or silver ETF shares due to Acts of God, war, force majeure, confiscation, computer glitches, fraud, insolvency, lawsuits, liens, garnishment, etc.
One final note on silver and gold ETFs, due to high annual ETF management fees, more often than not, it may be much less expensive to store precious metals in a
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private, segregated, fully insured gold and silver vault as opposed to having your silver ETF or gold ETF shares diluted from exchange trade fund management fees. The whole purpose of investing in precious metals is to keep your hard-earned wealth secure – a physical asset that can weather any economic storm. When you put your wealth in ETFs, you may simply become an unsecured creditor of a mega-bank that will happily gobble up your wealth if financial turmoil strikes. If your intention and purpose is to buy and hold onto precious metals as a safe haven against inflation and currency devaluation, holding physical gold and silver stored either in your home or in a segregated fully insured vault account is most often the better alternative.
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