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There are various blogs and videos that indicate that the gold that GLD holds (via HSBC) and the silver that SLV holds (via JP Morgan) is leveraged 50 to 1 or 100 to 1. For me there are some advantages to using these ETFs vs. one like CEF, and so I was wondering if this leverage is "fact or fiction". Do you have any concrete knowledge or concrete references on this subject? Or have you been able to wrap your head around this whole issue?

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Wouldn't trust "various blogs" too much. As a blog writer myself I know very well how easy it is to write things, and how hard it is to provide actual and reliable references to the things written. –  littleadv Sep 15 '11 at 18:34
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up vote 8 down vote accepted

All public available information indicates the two ETFs you mention are 1:1, no leverage. GLD is priced as 1/10 oz of gold, so 10 shares is one ounce, as will move as one ounce of Gold, no leverage. 100 to 1? How would that work? A 1% drop would wipe the ETF out?

By the way, I'd ask that you provide a link or two to the sites you cite. Are they mainstream, or 'conspiracy theory' sites? Additional note, I expect to read somewhat literate articles, not YouTube videos that never get to the point even after 5 minutes. Last, I dismiss any article whose title is "Gold going to $57,000." Do you know how much gold is in the world? Right, 5.3 billion oz. Can you multiply 5.3B by $57K? $302Trillion. Do you know what the wealth of every person on the planet adds up to? I'll give you a hint. Less.

Update - It occurs to me you might be asking if the ETF holds not gold, but derivatives. Uh, nope. See the GLD quote on Yahoo. It describes this, and 'holdings' indicates 100% physical metal.

Update - Ray - Admittedly there's a train wreck aspect to this, tough to ignore some of the crazily titled videos. JP Morgan Class Action Suit will lead to silver explosion! on one hand, the speaker Bob Chapman, references something I can imagine being true, a certain amount of manipulation, which can occur in stocks the same as the metal ETFs. Yes, it sounds like conspiracy theory, but where there's a dollar to be made I know these things can happen. But, he makes the same reference, that, while recommending physical metal, uses the line "the ETF will rise 10 times as fast." This makes no sense at any level.

Here's the confusion (if you know this, then it's for others, I don't know your background) - When dealing in the futures market, as a buyer you don't own anything most of the time. A standard gold contract is 100 oz, so current value is about $180,000, with a margin requirement of $9,450. This isn't a typo. You can 'bet' on rising gold prices by putting 5% into an account. This raises new and troubling questions. First, the margin requirement can be changed removing some of this leverage, but also requiring contract holders to potentially sell even though they are in a positive profit position. More so, the amount of gold represented by the total contracts outstanding is far more than anyone can deliver. Most of these contracts settle for cash, but as the expiration nears, the broker would call and advise that you must sell the contract or prepare to put up the full amount and take your 100oz gold bar. If too many contact holders look to take delivery, you'd see a wild distortion in the market, i.e. a price spike, and then some activity shortly after. The answer about the ETF, and Duff's link to the GLD prospectus) covers one aspect of your question, but this doesn't remove the potential for manipulation or other misdeeds.

Update - There's a fellow Adrian Douglas who refers to the gold market as being a fractional reserve market. He references the trading on LBMA (The London Bullion Market Association) and concludes that more gold is owned than actually exists. What I don't see is how he accounts for the same ounce being traded frequently. Of course the trading will multiply up to a huge number of ounces, but after a month of buying and selling, a trader may own nothing, yet have buy/sells totaling tens of thousands of ounces. I am open minded, really. I just don't see the specifics to back his claims, that people believe they own 30 times the gold that exists. A futures contract doesn't count as I would sell it before taking delivery, this is the way futures contracts have always worked. A lot of trading, little delivered commodities in comparison.

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Other "big names" to look into on this subject: Eric Sprott, Mike Maloney, and James Turk e.g. youtube.com/watch?v=0ECHa8QITRo. I'm still trying to make sense of it all. –  Ray K Sep 15 '11 at 19:01
    
Another one -- see part I too: youtube.com/watch?v=xG4eXELL2sk&feature=related –  Ray K Sep 15 '11 at 19:06
    
News / congressional: youtube.com/watch?v=xG4eXELL2sk&feature=related , see video description while playing –  Ray K Sep 15 '11 at 19:27
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I think I'm not in the habit of being dismissive, to the point where I disclose my own biases pretty clearly. I suggested you provide examples of people discussing the leverage you mention. The first link you provided above was a 15 minute you tube interview. I made it through the first 5 minutes, and called it quits. The video's title was "Gold to $57000....." which should have been enough for me to not bother. If you have any linked to written material, I'll still take a read, but I'll not be spending time listening to speakers whose cadence is enough to put me to sleep, content aside. –  JoeTaxpayer Sep 15 '11 at 20:56
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Read the prospectus for the funds. Don't listen to quacks.

The GLD prospectus has a fairly comprehensive evaluation of risks associated with the fund.

Be careful with blogs or individuals, particularly individuals with "proprietary techniques" for making money, who talk about gold & silver. Crackpots of all stripes gravitate towards gold like flies to honey.

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+1 for "Crackpots of all stripes gravitate towards gold like flies to honey."... so true.. –  littleadv Jun 8 '12 at 1:12
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The fact that GLD and SLV are strictly physical gold and silver has already been answered by the other answerer.

But, I think I can help out with where the confusion is coming from. With the proliferation of leveraged ETFs, like double long or double short ETFs, some sites have standardized how they display that info in the quick details screens, so you can easily see the amount of leverage and the direction.

Bear in mind that ETFs have to follow a formula, so, a double short ETF would always be 200% levered to the downside if it's index (in other words, if that index goes down 5% one day, you make 10%. If it goes up 5%, you lose 10%). It can't change how levered it is.

So, where it says 'leverage':

100   = 100% long (no leverage)
-100  = 100% short (no leverage)
200   = 200% long (levered so $1 controls $2 of investment)
-200  = 200% short (levered so $1 controls $2 of investment)
300   = 300% long (levered so $1 controls $3 of investment)
-300  = 300% short (levered so $1 controls $3 of investment)

GLD and SLV would both be leverage: 100, meaning they're not levered, and they're long those commodities.

It's better to think of it as what percentage of the index's gain (or loss) they intend to capture.

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The reality is that in "modern" financial markets you can never know. We were told MF Global accounts were segregated and could not be touched - now we are told "they don't know where" the money went. Simply look at history - often funds such as SLV have gone under despite all assurances. I'd recommend using SLV as an efficient means of small purchases and sales, but take physical delivery for larger long term holdings. BTW this will also save you a fortune on administration fees and the annual 30% cap gain tax that SLV is subject to.

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