Paper Gold & Silver

Gold and silver Electronically Traded Funds, or ETFs, are strange animals. It’s easy enough to understand the appeal of them; after all- buying, storing, and especially selling physical metal can be an enormous pain in the rear. I guess whether or not they’re a valid vehicle all boils down to personal reasons, and personal motivations.

For the pure speculator, the ETF is a godsend. Tons of liquidity means they can get in quick… and get out quicker. They’re not too concerned with whether or not the asset supposedly backing the fund actually exists or not, because they’re not going to be around too long, and have no intention of ever placing their hands on the product.

In all honesty, these funds have done the precious metal markets a huge favor, by packaging gold and silver ownership into a form suitable for the masses. Dealing with the actual metal is not many people’s cup of tea, and I also think many people hold the view that holding 1000 shares of gold is “investing,” but holding 100 ounces of gold is “hoarding.” Funny how that works, eh?

Much of the current “flight to quality,” as it’s called, is really the desire of investors to avoid getting burned by the exotic (and very opaque) paper investments that have been all the rage these last few years. The recent mortgage-CDO meltdown highlighted to many people the risk of losing everything to an investment that they didn’t really understand in the first place. It’s not so with precious metals; you own them, there they are, and they’re worth whatever they’re worth. It’s hard to obfuscate a chunk of metal.

To me, these ETFs do just that—obfuscate—by adding a layer of abstraction on top of something whose main draw is simplicity and transparency. If I have to wonder if the asset backing the share actually exists, that’s not simple, and it’s certainly not transparent. Not to mention that for those of us who are in it for the long haul, it makes it a little too easy to press the panic button and liquidate on a whim (because it sure would be nice to get that hot tub…).

At the end of the day, I think of a vote for gold or silver as a vote of no confidence in the paper-based insanity that’s been growing in our equity markets. The FED obviously knows that also, judging by the way central banks coordinate massive gold sales in an attempt to hammer the market. They know they can explain away anything *except* rising gold prices.

I suppose this is why the idea of trading gold and silver paper “shares” seems so strange to me. While holding physical metal may be something of a pain, if “the stuff” hits the fan, you can actually use it for what it’s good for—survival.