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Thursday, September 18, 2008

Gold ETF, How Safe is it NOW in Today’s Financial Climate

In September 2008, shareholders in EFT Securities were left high and dry and unable to trade popular commodity securities, due to concerns over the future of their backer, AIG.

In fact, banks and brokerages stopped making markets in the Exchange Traded Commodities (ETCs) backed by the troubled insurer and sold by ETF Securities (ETFS). The price of the stocks also plummeted over 50 percent due to the worries over AIG.

Gold ETFs are vastly different to holding real gold. Turbulence, such as the above in the market, can affect the value of those gold ETFs markedly.

Owning gold ETFs means that one owns a stock in the price of gold rather than gold itself even though corporations such as ETF Securities owns gold. How much gold they own is not clearly discernable by the average “Joe” who may own ETF stocks.


Even a downgrading by credit agencies S&P or Moodies can drastically affect the share price in ETF Securities, as it has done, In fact in September 2008 shares in ETF Securities products, which are backed by AIG, were down as much as 50% in one morning after US insurer was downgraded by credit agencies S&P and Moody’s.

The cold hard reality is that if the issuer of an exchange traded note goes bankrupt, investors holding exchange traded products backed by these notes will join the ranks of other creditors hoping to get their money back.

Streettracks gold etf, for example, could also be in the same boat. Streettrack gold shares, Streettrack gold trust, you name it. It can equally apply to Canadian gold etf, gold etf in India and Barclays gold. Any etf gold funds in fact could suffer the same fate. With any gold etf one does not own actual gold and cannot redeem gold from the fund.

Indeed, to buy gold etf is a venturous and courageous, and one might almost say dangerous activity, in today’s economic climate.

However, for those astute people who decide to buy gold and own actual physical gold, as distinct to ETFs, their stored value remains stable. As the value of the dollar decreases, it takes more dollars to buy an ounce of real gold. The "share price" or stock of actual solid gold does not deteriorate as a result of any financial meltdown. Indeed the value of their gold holdings are very likely to go up and the gold price will continue to increase with the addition of more and more people seeing it, quite rightly, as a safe haven in these stressful times.

The true value of gold, measured in dollars (US) is more like 1500 according to some sources and this means that, if you buy gold now and hold on to your gold, your holding is going to be very safe.