Paper Gold

I saw the world crashing all around your face
Never really knowing it was always mesh and lace
--Modern English

Rick Santelli posits that securitization, primarily in the form of exchange traded funds (ETFs), has changed the dynamic of the gold market. Formerly, many buyers formerly took possession of physical gold as an insurance policy against a monetary meltdown, today's investors can easily get exposure to gold via ETFs like GLD without having to deal with the hassle of taking delivery and storage costs.

The problem, notes Rick, is that, should a meltdown actually occur, then those invested in gold ETFs don't have bullion. They have pieces of paper.

Those pieces of paper will likely not be convertible into gold. Not only do the gold ETF prospectuses indicate such, but the potential for re-hypothecation likely means that there is not enough physical bullion to fully back paper gold.

I share his concern. In the event of real financial market stress, the supply of physical gold is likely to dry up, which could render the value of paper gold worthless.

Imagine this scenario. The price of physical gold zoom...$2000...$3000 per oz. At the same time, the prices of GLD plummets...$100...$50 per share.

For me, paper gold is best owned in my retirement accounts that is full of paper securities anyway. Securities of all stripes could all be at risk in the event of an institutional crack-up. If I choose the right paper gold vehicle (I like CEF and its all gold cousin GTU), then I still might be able to salvage something from a gold insurance policy--even if it is of the paper variety.

positions in CEF, GTU