"Physical Gold versus Paper ETF Gold”

An Analysis of Why Physical Has Priority

 by D Mitchell, IPM Group 28th April 2015



I have heard from a number of investors that they agree a diversification into gold and (or) precious metals is becoming extremely relevant at this juncture in our monetary history, especially considering the obvious deformed extremes our markets are being pushed too (negative interest rates, stocks markets trading on extreme multiples and priced for perfection, historical world record debt leverage and growing at more than double the rate of world growth, central bank largesse via huge printing programs of currency aka QE, etc.)

But these same investors then turn around and state they hold a preference for paper gold or other financial paper representations of the precious metals, which I find a little strange but then again maybe they are not aware of the facts? So I thought we should have a clear rational analysis of both forms of the trade  - physical or paper ?

The reader can then make his or her own decision, with the relevant facts at hand.

Now for this analysis to take place we will compare the markets favourite paper form of gold, that being ETF’s and the market leader SPDR Trust - GLD. Then making a direct comparison to holding physical vaulted gold within our storage facility at Freeport of Singapore, that is actually available to everyone.


Disclaimer : This is not a deep forensic analysis of paper instruments across the spectrum offered to customers. We are also not looking to lay claim or produce evidence of fraud or malfeasance by the institutions that manage these ETF’s or trusts. This is simply making the investor aware of the problems and conflict of interests these instruments may represent.

What are the considerations you need to make (scroll down to relevant section or jump to conclusion).

1...What is the purpose of Gold in the first place ? This is not an argument of why gold is in a greater bull market  - but rather the importance of gold in of itself within our monetary system and a vital part of your asset portfolio as wealth preservation.

2...Security of ones holdings and the risks that are very apparent and applicable.

3...Total cost of holding the trade in the first place, which one is effectively more expensive ? Gold ETF’s does have it’s place but not as many people seem to give it credit for.

4...Tax implications on holding gold in physical form or paper.




1…The purpose of gold ?

It’s a crisis metal, an investment par excellence in times of severe stress or emergency, be it wars, insolvency,  loss of confidence in the monetary system itself or a hedge against political instability.

Looking back over the last century, when has gold performed ?


Great Depression of 1930's  -  The holding of physical gold was made illegal in the USA, but was then promptly revalued by near 70% from $20.67 to $35 by the government.This pushed investors into the prime gold miners of the day Homestake Mining and Dome Mines (for example) that appreciated near 550% (in just a few short years) between them in actual terms, but in real terms that appreciation was that much greater as consumer prices and assets plummeted in value.

Economic crisis of the 1970’s  - Rise of terrorism, 1972 Olympics Munich massacre, 1973 oil crisis, 1979 energy crisis, Arab-Israeli conflicts – Yom Kippur War, cold war escalations, rampant inflation etc, etc…Gold rallied over 2,000% between 1971 to 1980. Silver rallied over 3,000%  - although selling near the highs was almost impossible.

Previous decade 2000 to 2011 - was a litany of crisis from the stock bubbles of 2000, to the twin towers, real negative interest rates and finally the 2008/09 collapse (to name but a few)  - Gold rallied over 700% between 2000 and 2011. Silver rallied 1,050%

As of now, Central Banks around the World are accumulating Gold as part of their reserves, this overall net buying which has been taking place since 2010 has not been seen in such size since the 1960’s. Most recently, the year 2014 was the 2nd largest buying spree by CB’s in over 50 years !

The vast majority of the World’s Central Banks holds the metal as reserve requirement diversification on their balance sheets as physical holdings and have been accumulating 1,000’s of tons of the metal over just the last few years alone!

Gold and or precious metals hold no 3rd party liability (unlike any other monetary asset) and considered one of the true safe forms of collateral in times of crisis – hence its appeal !

Rather than Gold being the pre-eminent monetary inflation proof trade, it’s quite simply crisis insurance and a wealth preservation vehicle. Considering the deteriorating World macro economic picture we find ourselves in we at IPM consider ‘fully allocated physical’ holdings as a compulsory part of ones overall asset portfolio, as it has been historically.


2… The security and safety of your asset holdings.


        Paper gold GLD -  So we have established what is gold’s appeal in the first place (and its stand alone qualities over and above other asset classes) is the fact that it has no 3rd party liability and recognised as a top tier monetary asset (see central banks).

So why would you then attach and also layer it with multiple  3rd party liabilities to the very asset your buying, which dilutes its purpose as the ultimate crisis insurance diversification ?

The very logic of the trade in the first place is negated by buying paper gold, when you actually consider why the trade was initiated in the first place.

Paper Gold is a short term trading product and not a long-term wealth preservation asset, especially in times of crisis. Avoiding paper gold or silver as much as possible or at least be very careful when you do so should be an investors priority.

Understanding GLD or SPDR (as its known) ETF is a great deal more exhaustive in itself. Put simply you have the marketing arm managed by ‘State Street Global Advisors’ and the sponsor ‘World Gold Council’, the trustee (bank of New York Mellon), the custodian (HSBC) and sub-custodians (chosen by the custodian) , however sub-custodians can also employ additional sub-custodians to hold the gold on behalf of GLD  - the custodians and sub-custodians hold the metal that is effectively the sole assets supporting the whole trust.


The trustee can be refused information by the sub-custodian as to the whereabouts of gold held by them on behalf of the ‘GLD trust’ and the fact it has been leased and (or) re-hypothecated (effectively sold).

The custodian of the metal (HSBC) can be left blameless in court if it is found that the sub-custodians have stolen or sold (leased) the GLD gold if they (HSBC) can give reason of the competence and integrity they held on behalf of the sub-custodian(s) and hence not liable to losses of the GLD shareholder. Shareholders have very limited recourse on losses incurred.

ETFs, such as GLD and SLV, exempt themselves from providing evidence of their holdings.  They fend off audits through the use of multiple sub-custodians.


Examples within the prospectus itself, amongst many other issues we have …. 

The latest 10-K (Commission File Number 000-32356) on pages 18 and 26 respectively:

"Gold held by the Custodian(s) currently selected sub-custodians and by sub-custodians of sub-custodians may be held in vaults located in England or in other locations."

“In addition, the Trustee has no right to visit the premises of any subcustodian for the purposes of examining the Trust’s gold or any records maintained by the subcustodian, and no subcustodian is obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian”

“In addition, the ability of the Trustee to monitor the performance of the Custodian may be limited because under the Custody Agreement the Trustee has only limited rights to visit the premises of the Custodian for the purpose of examining the Trust’s gold

Page 10 of the prospectus states

“If the Trust’s gold is lost, damaged, stolen or destroyed under circumstances rendering a party liable to the Trust, the responsible party may not have the financial resources sufficient to satisfy the Trust’s claim.”  

On page 9

“The Trust does not insure its gold.”  

Further on page 12

“Gold held in the Trust’s unallocated gold account and any Authorized Participanet’s unallocated gold account will not be segregated from the Custodian’s assets.  If the Custodian becomes insolvent, its assets may not be adequate to satisfy a claim by the Trust or any Authorized Participant.  In addition, in the event of the Custodian’s insolvency, there may be a delay and costs incurred in identifying the bullion held in the Trust’s allocated gold account.”  


Clearly, GLD is impregnated with counter-party risk that may instantly and violently appear.

The effective reason for purchasing gold is as a wealth preservation asset in times of extreme stress within the system and hence the desire to hold a ‘hard’ asset outside of the financial system. Yet buying ETF’s such as the GLD SPDR you layer it with financial risk -  the very risk you seek to avoid in the first place ?

Let me just remind readers how many major financial institutions have vanished due to complete insolvency since 2007(even with the central banks printing money and re-liquidating the banking systems) Bear Stearns, ABN AMRO Bank,  Merril Lynch, Lehman Brothers, Washington Mutual, Bankia in fact 58 major banks and financial institutions (not inclusive of the many smaller institutions and banks). Not even mentioning the last debacle of MF Global.

If one or several of the sub-custodians where to follow the same route (recent analysis states that that is quite likely  -  the European banking system is presently insolvent using GAAP accounting) and the gold they hold just so happens to be no longer available  - well who takes that loss on the chin ?


        Physical Vaulted Gold  Buying gold directly from world recognised refineries and placing directly into a vault as fully ‘allocated’ and ‘segregated’ holdings under your own name  - well you have no liabilities attached !

“Allocated” precious metals are owned outright by the investor and are stored, under a safekeeping or custody arrangement, in a professional vault. It is the sole property of the investor and by law is segregated. “Allocated” holdings differ profoundly from “Unallocated” holdings.

Effectively this means our storage clients are not exposed to any credit or insolvency risks arising from the financial or monetary system.

In fact they are not exposed even from the bankruptcy of our own company.

Now a very important point to make is, you DO have ultimate liquidity in holding vaulted allocated gold in your own name, you can in effect sell at any point and any percentage of your holdings. Not only do we offer this service to our customers, but you have a long list of buyers from the dealers to the refineries and the central banks.

The beauty of holding gold within a vault is the fact it has come directly from the refiners or mints, so any disagreement is muted when it comes to authenticity of the metal.

As gold enters its periodic buying frenzy’s, physical metal premiums escalate substantially over and above spot paper prices  - effectively the worlds buyers want the real hard asset and not the paper !!!



3...... Total cost of holding the trade in the first place, which one is effectively more expensive ? Paper or Physical


Gold Exchange Traded Funds ( ETFs ) are much more expensive!

Gold ETF fees vs. Master / Sub-Account Segregated Vault Storage costs

Example: $250,000 or 202 oz gold bullion with $ 1,200.00 gold spot.


Gold ETF Vehicle

Minimum Annual Fee

Minimum Annual Cost



$ 1,000



$ 625



$ 975



$ 975



$ 1,000



Vault / Despository

Annual Fee

Annual Cost

IPM Group Freeport of Singapore


$ 550


Investors must search long and hard to uncover the total annual expenses associated with gold ETF’s or other paper representations of gold. The actual market average of total costs is 0.54%. Gold and silver exchange traded funds, or ETFs, are designed to deduct fees and expenses from investor shares, thus they reduce one’s paper holdings over time.

Investors who hold physical bullion in third party segregated vault storage never have their physical gold or silver holdings reduced due to storage nor management fees.  Customers are simply charged their respective vault storage fees in fiat currency terms (US$ or Sing$), this maintains your investment holding which we believe is the ultimate strategy !


4....Tax implications on holding gold in physical form or paper.


For the average investor, the holding of ETF’s are fully taxable on any capital gains you may make. Obviously this is very dependent on the jurisdiction you or your investment trust resides.

Our vaulted storage facility within Freeport is a free trade zone where transactions (buying or selling) are tax-exempt and the identity of the beneficial owner is not disclosed.

A free trade zone (FTZ), also sometimes referred to as a “bonded area” is a specific class of special economic zone. They are a geographic area where goods may be landed, handled, manufactured or reconfigured, and re-exported without the intervention of the customs authorities.

Freeport’s are something of a fiscal no-man’s-land. The “free” refers to the suspension of customs duties and taxes. This benefit may have been originally intended as temporary, while goods were in transit, but for much of the stored wealth it is, in effect, permanent, as there is no time limit: bullion or fine art can be flown in from another country and stored for decades without attracting a levy. Better still, sales of goods in FreePort incur no value-added or capital-gains taxes. These are (technically) payable in the destination country when an item leaves this parallel fiscal universe, but by then it may have changed hands several times over.




The term paper gold means you have a piece of paper acting as a substitute for physical gold. With paper gold, you don't own gold; in most cases you don't even own a promise to receive physical gold, you are a creditor of the party issuing the paper gold certificate or account, and thus subject to a myriad of counter-party risks and potential bankruptcy.

Not only that but SPDR ETF Trust does not even insure its own Gold.

I have proven that holding physical is extremely liquid (in fact more so, as you can sell your physical at anytime rather than waiting for the stock market to open to sell your paper ETF). I have also proven without doubt that it’s actually cheaper to hold physical gold in your own name with the world’s foremost vaulting facilities.

I have also pointed out the supreme advantages physical holds over paper in regards to tax and capital gains, but also assurance that your metal is free from the ever growing risk of government tax grabs (see Cyprus ‘bail-in’ actions of the levy against all bank deposits, Spain and Italy's newly instigated wealth taxation policies, Spain’s reverse ‘capital gains’ on house prices (new buyer pays 8% tax on the difference between the original owners price and the new purchaser price), the list just goes on and on..)

In fact governments cannot request who holds what within a freeport vault.

An investor in physical gold will control everything: quality, quantity, security and storage from start to finish. When it comes to storing value for the future, what else could be safer or more powerful?

Considering the fact it is widely accepted that gold has been re-hypothecated over many times and the leverage of paper to physical is probably over 100 to 1, when the gold market re-enters it parabolic bull market the premium for physical does extend quite quickly, as we observed in 2010 and 2011.


To summarise......


Physical Gold

Gold ETFs

Control over your wealth

-  No real control

Full ownership

-  You never own any gold

Personal security and peace of mind

-  Trust in a third party is required

Secure investment

-  Speculative investment

Unique element to your portfolio

-  Similar to any other share or fund

Low risk

-  Higher risk

Crisis insurance

-  Open to same risks as all investments

Timeless asset

-  Not an asset

Keep for generations

-  Too risky to keep for generations


Protect your wealth; invest in physical gold, silver or other precious metals at best prices from Indigo Precious Metals. Physical delivery in Singapore, Malaysia or safe storage at Free port Singapore.