Getting physical gold bars and coins instead of the corresponding ETF (GLD) has been the

rallying cry for many gold investors in the USA in 2013.

Before the GLD ETF was launched, people wanting to invest in gold would have to buy

coins and bars from local gold dealers and store the coins and bars. That was clearly not very

convenient. There was markup to pay, security risks, and storage costs. So, gold investors would

often invest in the gold miners instead. Lets examine how the miners have done since the launch

of the ETF. The gold miners have had virtually no return since the GLD ETF was launched

(November 2004). This is again as expected. Once there was an option to invest directly in gold

without the trouble of paying markups to the dealers and then storing the physical gold, gold

investors moved a large part of their money from the miners to the GLD ETF. This caused the

GLD ETF to shoot up and with it the price of gold, while the miners essentially flat lined. In

summary, the GLD ETF has been marvelous for the price of gold. Why do so many people want

to get rid of it and go back to the old days of getting the metal itself? A bit of this is serendipity.

There is an ongoing suspicion that the GLD ETF is not actually backed by physical gold, making

it no better than the fiat currency that gold investors try to avoid. There is some basis for this

suspicion and according to Forbes:

“Where most investors are confused about GLD, though, is about redemption. Even though GLD

is physically backed, ordinary investors cant just go to London, or New York and redeem

their bullion. Only authorized participants are allowed to create or redeem shares. Authorized

participants are registered broker-dealers or other securities market participants who have

entered into agreements with the trustee and sponsor”.

But the real issue may be more perverse. The apparent losers in the launch of the ETF may be

the miners whose stock prices have languished, but the real losers are the dealers themselves

who could in the past make a fortune by charging exorbitant markups to gold investors. A report

made by ABC News tells us the following:

“In February of this year, Gold line International, one of the countrys largest dealers of gold and

precious metals, agreed to pay $4.5 million to customers who had bought gold coins through

them. The company, which gained hundreds of millions in sales from endorsements from

conservative radio talk show host Glenn Beck, was accused of charging customers more than

55% more for their coins than their actual worth in gold. Under the terms of the settlement, Gold

line is required to pay out an additional $800,000 into a fund towards settling any future gold

fraud claims.”

The recent rise in popularity of gold in the USA has coincided with several talk show hosts

recommending it to their listeners. Some of these talk show hosts apparently (as the above

story suggests) were on the payroll of the dealers who they were touting, and who in turn were

charging obscenely high markups. Clearly gold investors were not getting the best advice from

these groups of talk show hosts.

There is also a belief that buying the metal itself will cause gold prices to skyrocket. However,

I am personally not bullish on gold prices for a variety of reasons, so this is not an endorsement