Paper Metal Products or Physical Gold and Silver

Paper Metal Products or Physical Gold and Silver

Paper metal products have become a hot topic nowadays and most of the discussion about it focuses on its advantages and disadvantages in comparison with physical metals. Also, the topic is surrounded with short names and abbreviations which makes it challenging to understand and what all the fuss is about it. Here we will try to first understand what are paper metal products all about and how they “came to life”. We will also point to the risks and advantages of such products as opposed to physical gold and silver.

There are three notions that define the concept of paper metal products:

ETF or Exchange Traded Fund

An ETF is a type of fund which owns the underlying assets (shares of stock, bonds, oil futures, gold/silver bars, foreign currency, etc.) and divides ownership of those assets into shares. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. Prices on ETF change throughout the day as shares are traded. ETFs usually benefit from higher daily liquidity and lower fees than mutual funds offer, making them an attractive alternative for individual investors.


GLD is the symbol for the SPDR Gold Shares exchange traded fund, where SPDR represents a large family of ETFs traded in US, Europe and parts of Asia. GLD fund began trading on November 18th, 2004 and is currently evaluated at about $33.12 billion in assets, being also listed on the New York Stock Exchange Arca. The intent and novelty of the GLD consists in the possibility of investors to participate in the gold market without having to make actual delivery of the gold or deal with other potential barriers such as custody or transaction costs. The GLD shares are closely following the price of gold, retracting fund’s fees and other costs. Also the fund keeps equivalent in actual gold, 400-ounces bars, at a vault in London, to back up the GLD shares that are being bought and sold.


SLV is the short acronym for the iShares Silver Trust ETF, that began trading in April 2006, and is also listed on the New York Stock Exchange Arca. Similarly, as GLD, SLV was created with the purpose of giving investors a convenient method to gain access to the silver market with no delivery needed or other costs with storage and deposit what would come up when owning physical silver. SLV registers about $6.5 billion in net assets and moves closely with the price of physical silver. Transactions with SLV shares are possible due to them being backed up by real silver bars in one of the fund's vaults.

Should you buy GLD/SLV or physical Gold and Silver?

At first sight, ETF shares as GLD and SLV are very tempting and would present themselves as ideal alternatives for not dealing with the delivery and storage and additional costs, and probably this indeed is a great solution for investors with a high-risk appetite. Most probably there would have been no drawbacks if investors could have had effortless access to their physical gold - equivalent of GLD shares - whenever they decided to make this conversion. However, there are already several documented examples when such a conversion is not easy and even not possible, so skepticism regarding paper metal products as GLD and SLV has naturally built up.

One of the main drawbacks of the product is that owning shares of GLD or SLV does not mean one owns actual physical gold or silver. This is a key element that needs to be taken into consideration before making transactions with ETF shares. Although the fund has its shares based on physical gold and silver that is stored in a specific place, not any investor has access to it. There are special conditions, which at current market prices, are quite difficult, if not impossible, to be met by an individual investor. For even beginning the procedure of exchanging GLD and SLV in physical metal, one needs to be an Authorized Participant (who usually are large financial institutions like banks or investment companies) and has to deal at least 100,000 shares for GLD and 50,000 for SLV which at current prices are 8 digit amounts in US dollars. In an obvious way, these amounts are not within reach for many of investors.

Beside the above mentioned procedure, ETFs carry the so-called counterparty risk, which means that your investment’s success dependents on other parties. For example, your investment is influenced by fund’s structure, reputation, regulatory compliance, delivery procedures (as the one described above), etc.

An excellent example to describe counterparty risk is having HSBC as the custodian for GLD, which means that HSBC is responsible for sourcing and storing the gold. At the same time, HSBC is the bank that has been fined for money laundering for drug cartels in Mexico and Columbia, it accepted deposits in cash in very large amounts, it manipulated foreign exchange rates and faced charges for predatory lending practices. With such a description, it becomes obvious the very high risk that applies for GLD/SLV ETFs.

With ETFs, investors are not buying and selling physical metals, but financial products which come with a very high risk. And why such funds would not release more GLD shares than the physical gold they’re having in their vaults? It is estimated that the value of such contracts surpass the actual gold quantity available worldwide by about 150 times.

Several authors have pointed out the more and more noticeable tendency of being increasingly challenging to draw out funds (cash of metals) from banks. They are getting very sophisticated at including various obstacles to determine investors to keep their assets in the bank. This can be explained by the fear of another economic crises coming in, when the strong banks will be the ones that would manage to “lock down” as much cash and gold as possible.

What is the most important benefit of physical Gold?

When playing with GLD/SLV shares, you may well make profits when gold/silver prices go high, and you can decide to sell entirely your shares and quit the market, essential to realize is that one should not expect to get physical gold or silver in exchange for the investment.

With physical metals, the most important advantage is that you can see the gold that you own. Despite the delivery, storage, and associated costs, ownership of the product is yours and you can decide at any time and anywhere to convert it to other monetary equivalents, as

Gold and Silver are recognizable and exchangeable worldwide. For the investors that prefer certainty and have a low-risk appetite, then physical precious metals would be the obvious investment choice. There is basically no risk that at any point you won’t be able to harness your investment.