I came across something about counterparty risks with gold ETFs, specifically the risk tied to Authorized Participants (APs). Does this bother anyone else, and could this be avoided by opting for a gold mutual fund instead? There’s also a mention of risks in the London market, but I’m not sure how that would apply elsewhere. I’m based in Japan and have an option to buy an ETF holding all its gold here in Japan. Are these risks basically the same for all physical gold ETFs regardless of location?
Here’s the part that caught my attention:
“Unlike physical gold, ETFs have counterparty risk, as there’s a chance that other parties like the Authorized Participant, trustee, or others could default or fail to keep up their side of the deal.”
Barisheff also pointed out that many assume ETFs are like mutual funds but cheaper. He argues that ETFs don’t offer the same benefits as open-end mutual funds, which have certain protections. Thoughts?
Check out the Sprott Physical Gold Trust (CA:PHYS). Be careful with JP Morgan products… read the details carefully, as they have the option to collapse the trust and pay out ‘fair market value.’
Brett said:
Check out the Sprott Physical Gold Trust (CA:PHYS). Be careful with JP Morgan products… read the details carefully, as they have the option to collapse the trust and pay out ‘fair market value.’
It’s more than just shady; JP Morgan’s precious metals team has a bad reputation. The global head even got prison time for manipulation and fraud.
@Briar
That’s pretty serious, but how much does one trader’s actions affect ETFs that track the gold price? I’m currently holding Pictet’s physical gold mutual fund and IAU by Blackrock.
Brett said:
Check out the Sprott Physical Gold Trust (CA:PHYS). Be careful with JP Morgan products… read the details carefully, as they have the option to collapse the trust and pay out ‘fair market value.’
Yeah, I’ve heard about Sprott, but unfortunately, it’s not available in Japan. Right now, I invest in a bit of Pictet’s physical gold mutual fund, which I think keeps its gold in Switzerland.
Dane said:
Why not just buy physical gold directly?
And then store it… where? Under the bed? In mine?
The whole idea of buying physical gold is usually tied to not trusting the financial system. If you’re going that route, trusting an ETF inside that same system doesn’t make much sense.
@Sable
Owning gold isn’t just for doomsday reasons. You can still believe in the system and hold gold as a hedge against rough economic patches. Gold’s low correlation with stocks and bonds can be a big plus for balancing a portfolio.
I’d prefer an institution hold it for me, since keeping physical gold has its own risks.
The only way around counterparty risk is buying physical gold, but that has its own downsides—like higher costs and the risk of theft. With funds, you’re relying on contracts holding up. I’d consider the risk of default very low, but if it happened, it would probably be during a crisis, which is the exact scenario where you’d want gold. For small amounts, I’d go with physical.
Every ETF has counterparty risk from APs, but it’s minimal, like 20-minute increments. Yes, an AP might default, but futures trading for gold makes this negligible. Honestly, this is a non-issue.
Nuri said:
Every ETF has counterparty risk from APs, but it’s minimal, like 20-minute increments. Yes, an AP might default, but futures trading for gold makes this negligible. Honestly, this is a non-issue.
Did you read the article? It’s not talking about individual defaults but a full financial crisis.
“If a big bullion bank fails, all bullion held by LPMCL members could be at the disposal of central banks managing the crisis.”
If the system collapses, you can’t assume the central banks will prioritize property rights.
@Spence
This sounds like fear-mongering. These ‘bullion banks’ don’t exist as the article implies, and the BOE’s power is only within England. This is overblown.
Nuri said: @Spence
This sounds like fear-mongering. These ‘bullion banks’ don’t exist as the article implies, and the BOE’s power is only within England. This is overblown.
Bullion banks just refers to banks involved in bullion banking, and they’ve failed before. Also, in a crisis, it’s possible that the BOE could repurpose assets stored within its jurisdiction.
I’m not sure you know more than the article’s authors about UK laws or the BOE’s possible actions in a crisis.
If an ETF collapses, it would go into liquidation, so you’d get your share of the assets (gold, stocks, etc.) back in cash. This would mean you might lose some money depending on the market, but you wouldn’t lose everything. If the fund has no assets, that’s different, but you’d see that in their financials.
@Leith
Did you read the article? It’s not just about liquidation. There’s a risk that central banks could claim the assets during a crisis, especially if the gold is stored in London.
“If a big bullion bank fails, the bullion held by LPMCL members could be used by central banks through the BOE to manage the crisis.”