A reader asked me to discuss the impact of ETFs on precious metals. The basics have been covered many times in articles like this one. So I’m taking the question as: do I have anything useful to add to what people are saying about ETFs?
Perhaps I do…
Paper Is Not Gold
This may seem obvious, but it’s worth stressing, because some ETFs are marketed as an easy way to own gold. They are not. They are an easy way to gain exposure to movements in the gold price.
One of the main benefits of having physical bullion in one’s direct possession and control is that there’s no counterparty risk. It’s the financial asset for which there is no liability—the long with no short.
The moment I trade this for an ETF—even the best, most secure, and easily redeemable ETF—I introduce counterparty risk. My asset becomes someone else’s liability. There’s now a short that can fail me.
I’m not interested.
Nothing Beats Gold and Silver Stocks for Speculation
ETFs are no substitute for the security of owning bullion, but they are vehicles for speculating on movements in the prices of gold and silver. That can be leveraged with call and put options.
Personally, I don’t speculate on movements in the prices of precious metals by buying bullion—nor the ETFs that represent them. I put my savings in physical bullion and hope to never have to dip into that stash. For speculation, nothing beats gold and silver stocks. That goes double for extremely volatile junior stocks.
Junior metals stocks are the vehicles that deliver 10-baggers (1,000% gains) for savvy speculators who can pick the right ones.
I’ve landed 20-baggers in my career, speculating on such stocks. My friends Doug Casey and Rick Rule have had 100-baggers on such stocks in their careers.
This is why I don’t own any ETF shares. If I want the security of owning gold or silver, I buy bullion. If I want to speculate on higher (or lower) precious metals prices, I buy the best junior gold and silver stocks (or short the worst ones).
For me, ETFs are no substitute here either.
But for someone more risk averse, they could be. If I were living on a fixed income, I might see this differently. If I couldn’t afford to take the risk of speculating on junior resource stocks, but was convinced a given metal was going up or down, speculating via and ETF would be a less risky way to go.
ETFs and the Price of Gold
I remember when GLD was launched; gold bugs were excited about the new buying the fund would bring to the gold market. And it was true. GLD grew at an astonishing rate in its first years, adding millions of ounces of buying pressure to the market. It’s open to question how much of that gold would have been bought anyway in other forms, but the fact remains.
The less happy fact is that when the market went into reverse, GLD and other funds had to sell gold. They did so on the scale of central banks. The outflows added millions of ounces of selling pressure, exacerbating the decline. Since most central banks were buying at the time, the ETF selloff was arguably a substantial contributor to the length and depth of the 2011–2015 bear market for gold.
From this, you can probably guess what I’m going to say next: I don’t see the precious metals ETFs as a fundamental factor in the gold and silver markets.
ETFs have made the metals more volatile, but they don’t cause them to rise or fall.
ETFs add momentum to both the up- and downsides, with the potential to create massive vicious or virtuous cycles between price and sentiment.
ETFs make it more convenient for paper traders to get in and out of gold—but I’m not entirely sure that’s a good thing.
And again, ETFs are no substitute for owning bullion or speculating on “the most volatile stocks on earth.”
That’s my take,
