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Thursday, August 07, 2008

Wall Street Gold Hustlers?

So there are these things called Exchange Traded Funds (ETFs), which allow investors to gain exposure to non-stocks (like oil, gold, bonds, Asian market, etc.) with the ease of stocks. What happens is that you buy a share of the ETF, and then the ETF invests its money such that its own share price (in theory) mimics the thing you are ultimately trying to invest in.

Now oil ETFs, for example, don't actually buy and hold oil. (At least, not the ones I've researched.) Presumably this would be too costly. Instead, they buy futures contracts on oil, and then roll them over when the delivery date approaches.

But when it comes to gold, both the GLD and IAU ETFs claim that they invest in physical gold. GLD (not sure about IAU) also says that its investors can redeem shares of GLD for the equivalent amount of physical gold at any time.

Well I was talking with a guy who works for "an investment counselor in Switzerland" (the term he asked that I use), and he said that his firm wanted to test this redemption clause. The people running GLD came back and said something like, "We prefer that you continue to hold the shares. The amount you want to redeem is too small."

So at this point, I thought, "Oh OK, they wanted to get $2,800 worth of gold, and the ETF didn't want the hassle of redeeming that. No big deal."

But no, that's not it at all. The Swiss firm was trying to redeem about $30 million worth of GLD shares!!!

So they sold their shares, used the proceeds to buy actual gold bars, and are storing them in a Swiss bank.

This guy seemed intelligent, truthful, and non-delusional. (He thus passes Carlin's test.) Can anyone in the finance world comment on whether this story sounds plausible?

4 comments:

  1. !!! Yikes! That's scary! Sounds like the guy in Switzerland could have sued them for fraud, which they probably were comitting. I mean, the way ETFs typically ensure that their market price tracks their net asset value is to allow redemptions in exactly those cases: where you own a large number of shares and want redeem them for that portion of the securities held by the ETF.

    "We prefer"? Yeah, I prefer the bank let me put off my mortgage payments for a few years, but that's not how the financial world works!

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  2. In fairness to the ETF, I bet the "prefer" verb was due to the guy's translation. I've talked with a lot of Europeans (when I was at NYU), and that's just my hunch.

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  3. Anonymous1:53 PM

    Read the prospectus, especially pages 3 and 5. Only "Authorized Participants", i.e., brokers, banks, etc., who have established an account with the SPDR Gold Trust, can redeem baskets of shares. A basket contains 100,000 shares. If you have enough shares to redeem, you have to go through one of these entities to redeem them for gold. Fees are charged for the redemption process.

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