ETFs and the New Era of Avoiding Counterparty Risk

Exchange Traded Funds, or ETFs, provide investors with 'exposure' to the gold and silver markets without the hassle of having to handle real metals. In fact, it is precisely the fact that metals are not actually physically purchased that most investors choose to use this investment vehicle. Without doubt, not having to actually deal with the metals on a physical basis makes it all the much easier to trade this asset. The problem is that for the most part, these funds do not actually back up their shares with an equal amount of the underlying asset. Ensuring that these metals are actually physically purchased relieves people of these types of investment hazards.

With ETFs, investors can never be certain if their gold or silver has been allocated to them. These funds act in a similar manner to the current fractional reserve banking system in that only a fraction of the underlying asset needs to actually be in place for shares to be sold. Leading ETFs such as the GLD are not audited, and this is most disconcerting when considering that the creators of most ETFs are the same financial institutions which have taken huge risks and proven to have acted in a financially reckless manner.

For example, derivative investment vehicles such as the CDPP, a well-known credit-default-swap, are leveraged up to 80 to 1. Although there is much discussion about just how leveraged the most prominent gold and silver ETFs are, these types of facts should set off alarm bells as we head towards a global derivate crisis which is measured in the hundreds of trillions of dollars. To put that in perspective, it can be considered that America's debt is in the neighbourhood of 15 trillion dollars. When the current derivative bubble pops, no entity - or set of entities - will be able to bail these institutions out.

The ETF Cash Settlement Option

Upon reading the prospectus of any leading ETF such as the GLD or SLV, one will quickly come to the realization that an ETF investor is laden with a plethora of counterparty risk, which is the very thing precious metals investors are supposed to be attempting to avoid. Indeed, the main premise of purchasing precious metals is as a safe haven during crises, particularly currency crises. With the present penchant of central banks to print money as a 'solution' to poor fiscal planning over the last decades, current levels of currency depreciation will eventually lead to their collapse. For example, the American dollar has already depreciated 97% over the last century. Our present global reserve currency is literally on its last legs, with other international currencies closely following it. Interestingly, the US dollar is still viewed by some as a 'safe haven,' however, only as the leper with the most fingers.

Those investors holding ETF shares with prospectuses that stipulate that demands for physical delivery can be settled in cash are in for an unpleasant surprise when the present global economic crisis moves into its latter stage, which will be a complete lack of confidence in paper fiat currencies that are not backed by anything except the confidence of those who hold them. When this loss of confidence occurs and a rush for the exits follows, only physical ownership of real assets will count. Now is a time for investors to be very concerned about minimizing exposure to counterparty risk.

Futures, options and other derivative based investment vehicles are just as spurious. In some ways, they are even worse. For example, if a fund manager makes a wrong call, an investor could lose a lot of money even if the underlying asset is actually skyrocketing in price.

Our Physically Backed Trading Alternative

Now, a completely physically backed alternative exists for short term traders who do not simply wish to store their precious metals on a medium or long-term basis. G.I. Metals DMCC has created a viable trading platform whereby traders can take advantage of the changes in gold and silver prices and actively trade these metals without having to worry about the logistics of physically buying, storing, and selling them. As our client, you alert us as to when you want to buy or sell your physical metals, and we physically buy or sell the metal for you when you feel the time is right. It's as simple and transparent as that.

Please feel free to contact us at info@myglobalinvestments.com for more information about our Brokerage Service, which is a physically based, secure and viable alternative to ETFs, futures and options trading.