Effect of Gold ETFs on Gold Supply and Demand

As gold prices rise, so has the popularity of Gold ETFs (Exchange Traded Funds).It is commonly believed that investing in a Gold ETF is an investment in the hard asset without the cost of shipping, the hassle of storage and a level of increased safety.If you don't physically hold it there is no risk of you losing it.

First of all, don't think there isn't a cost attributed to shipping built into the ETF share costs somewhere.Secondly, did you know a 12 inch cube of gold is worth in excess of $13 million dollars?Really, the amount of space needed to store gold is minimal.And finally, in order for there to be less risk by not physically holding it yourself, the ETF would actually have to physically hold it.This is where it gets interesting.

It may be hard to believe but many ETFs hold contracts not the physical metal.Now we have come full circle.One of the very reasons people turn to gold to begin with is a lack of confidence in paper assets.For example, many believe the COMEX could not deliver on all the gold or silver they have under contract.

I'm not going to debate whether or not that is true, my point is, if you own gold because you are beginning to lose faith in paper, an ETF may not be the right move for you.Think about it.If the share price of a Gold ETF is NOT based on the physical trading, shipping and storing of the metal, how can the price adequately reflect fluctuations in gold supply and demand?No physical gold was demanded no physcial gold exchanged hands.What was demanded was more paper, the supply of which was created to meet the demand.

Some other gold ETFs represent investments in various indexes.Still others may represent a basket of gold mining stocks.For further explanation of various Gold ETFs check out this article that discusses 6 different types.This is not to say all ETFs hold paper gold and not physcial gold.Some do.But the bottom line is, the safest way to own gold is to own it yourself.Whether in a Gold IRA, where your gold is not part of someone's gold-backed trade or contract or in a safety deposit box, he who holds the gold controls the gold.

Here's one closing thought.You have to believe at some point, if expectations of $2000 Gold, for example, become widespread, don't you think some of the people who hold paper gold will want to convert to physical gold - just in case?That's when I believe real gold supply and demand fundamentals will take over and any scramble to physically deliver on contracts or convert paper to metal could send gold demand through the roof.