Gold can be invested in many ways, from buying physical commodities directly, buying shares in companies involved with mining gold, or investing in an exchange-traded fund like GLD that provides exposure to gold mining operations.
Every share of GLD represents a fractional beneficial ownership in gold bullion held by the fund and stored safely by HSBC vaults, offering diversification against inflation or declining markets. Investing in this precious metal could provide financial security through inflation protection and diversification.
How does GLD work?
The SPDR Gold Trust ETF (ticker: GLD) offers investors a convenient and cost-effective way to gain exposure to precious metals without the logistical challenges associated with owning and storing physical gold bullion. GLD shares are traded on exchanges worldwide much like stocks; each share backed by physical gold bullion held in an HSBC vault.
Investors holding GLD shares can also request to take delivery of the gold that backs them. When this occurs, the metal is removed from its GLD Allocated Account and moved into an unallocated account at a bank that specializes in gold storage – such as Bank of New York Mellon.
This unallocated account can only be accessed by authorized participants (APs), who can then create and redeem GLD shares in blocks of 100,000 known as baskets, with daily fluctuations causing the number of GLD shares to change from day to day; those holding unallocated accounts then sell these baskets of shares to investors as investors buy up the baskets they own from these authorized participants.
What is GLD?
GLD is the world’s largest physically backed gold exchange-traded fund (ETF). One of the first ETFs designed to offer investors a less expensive way to own gold bullion, GLD tracks the price of gold without transaction costs and tracks it accurately.
GLD allows investors to purchase shares through brokers and trade on the New York Stock Exchange like stocks; each share represents one-tenth of an ounce of gold, making GLD an appealing way for diversifying portfolios or acting as an inflation hedge.
As opposed to actual gold bullion, which has an objectively fixed value, shares of GLD do not have an equivalent market value and can trade above or below its net asset value. Furthermore, fees and expenses incurred by the fund could reduce returns significantly; investors should understand these risks prior to making an investment decision in GLD as it can involve possible principal loss.
What are the risks of investing in GLD?
SPDR Gold Shares (ticker GLD), is one of the world’s largest gold ETFs and offers investors an easy way to access gold without purchasing physical bullion bars they must store. GLD shares are listed for trading on the New York Stock Exchange like stocks; each share represents one-tenth of an ounce of gold.
GLD ETF relies on its trustee and custodian, HSBC, Britain’s biggest bank, to source and store gold that backs each share. Unfortunately, HSBC is known for engaging in predatory lending, money laundering, helping companies avoid taxes or sanctions, among other offenses.
Custodians for ETFs can be notoriously secretive about where their gold storage facility is situated. Any breakdown in this chain could result in delays when redeeming GLD shares or, worse still, reveal that there may not be as much gold in storage – this risk is known as counterparty risk.