Van: Last week following my article on the ETF GLD, I asked Ken Long, our resident ETF expert, “Does investing in GLD actually affect the price of gold?”
Ken: GLD is kind of in the same category of ETNs (Exchange Traded Notes*) which are promissory notes of the investment house that is guaranteeing performance of the instrument. There are quite a few of those out there that I don’t include in my ETF database for analysis at all for the very reason that there is an extra degree of risk that’s unsettling. GLD isn’t an ETN but it’s true that no one can validate the holdings of the contracts they hold.
With regards to my own personal trading styles and systems, I consider my ETF2 trading system to be a short term system. If I were a fundamentalist with a macro economic opinion and was looking to hedge with gold long term, I wouldn’t use GLD; I’d pay the extra premium to own bullion outright or consider coins.
The worries about GLD have been floating around since day one of the ETF, being fielded, for example in the goldbug groups on Yahoo where the conspiracy theorists argue that it’s really part of a shell game being played to manipulate the price of gold lower. The problem with “conspiracy theorists” is that once in awhile they are right.
There is an argument that can also be made about what your belief in the real value of an ounce of gold in your hand in your possession is worth as well. It’s really a function of the strength of the social contract that respects the ownership of private property, and the willingness of someone else to accept a chunk of shiny metal in exchange for something else. So, the onion skin sets of beliefs about the reality and value of trading instruments is pretty precarious the closer you look at it. That said, I concur that GLD in particular, when compared to other more “normal” ETFs has special risks that are political and controversial in nature.
GLD right now trades about 1.6B dollars a day in dollar volume; my sense is that it follows the spot price rather than pushing the spot price around. The gold contracts are trading something like $20B a day right now.
There are some flat out sound heuristics already available for action: no more than 10% of portfolio position in any single ETF; no use of ETNs whatsoever; maintain short term trading outlook; and after some research, perhaps exclude ETFs that trigger some kinds of alarms like GLD.
