According to Business Insider and Forbes, this is one of the biggest risks associated with gold ETFs. A counterparty risk exists when there is a possibility that another party to the contract will not comply with its part of the agreement. Given that so many institutions are involved in the ETF process, there are significant counterparty risks to consider. As if there weren’t enough aspects to consider, gold ETFs pose significant market risk for investors.
There is a price risk with gold ETFs, just as there is a price risk with gold. When the price of gold rises, so does the price of the gold ETF and vice versa. There is no other factor that influences the price of a gold ETF than the price of physical gold. The largest gold ETF in India, GOLDBEES, is traded at a fraction of 1 gram of gold.
However, they are associated with a number of risks that are inherent in their structure and functioning. And these risks will increase in line with systemic uncertainties. Despite their differences, both gold ETFs and gold futures offer investors the opportunity to diversify their positions in the metals asset class. That’s because gold ETF managers don’t invest in gold based on its numismatic value, nor are they looking for collector coins.
The custodian bank can make the gold available for collection at its office or at the office of a sub-depository, provided that one is used to store the gold. The iShares Gold Trust is one of the more attractive options when it comes to securing gold ETFs, and it still poses a risk for investors. Despite the fact that gold ETFs work more like stocks than actual gold investments, the government doesn’t regard them as stocks when taxing them. There may be more effective ways to buy and hold gold than gold ETF methods, which do not involve major counterparty risk and do not operate within the limits of the banking system or stock market.
According to the World Gold Council, it takes a long time for gold explorers to put new mines into production and find new gold deposits. On March 4, BlackRock, the sponsor of the iShares Gold Trust (IAU) gold ETF, announced that it had temporarily suspended issuing new fund shares. Gold ETFs can expose investors to liquidity-related risks, i.e. risks associated with how easy gold ETFs are to be bought or sold on the market and converted into cash. Custodian banks and sub-custodian banks, usually banks, are responsible for procuring and storing the physical gold associated with a gold ETF.
While physical gold can be bought, sold and stored outside the banking system, gold ETFs and the associated gold cannot. Gold ETFs may seem like a great option given the historical value that gold has had for over a century, but they’re actually not the best decision when it comes to using money to invest. Even central banks buy gold coins and bars, not gold ETFs, to manage risks, promote stability, and hedge against inflation and a falling dollar. Since the gold itself does not generate any income and yet there are expenses that must be covered, the ETF’s management is authorized to sell gold to cover these costs.