Is The Gold and Silver Held By ETFs Insured?

There has been much talk about owning gold and silver with various ETFs as it is a simple way to acquire the metal without paying too much in fees. Kiplinger was promoting gold ETFs recently and had this to say in an article claiming the iShares Comex Gold Trust (symbol IAU) was their favorite:

Parking money in gold, whatever happens to its price, is a pain. If you buy coins or bullion, you need insurance and secure storage. That’s why we recommend you own gold through exchange-traded funds. (Emphasis added)

But is the gold in ETFs actually insured? Is this a legitimate excuse not to buy physical gold for possession? The answer is the gold is not insured with ETFs and the same goes with silver ETFs.

An individual can however insure the physical gold they take possession of themselves, depending on which type of gold one acquires. State Farm for example will insure American Eagle 1 ounce bullion gold coins, but not bullion bars. Check with your own insurer before you buy physical bullion gold and silver to see what’s covered.

A simple look at the prospectuses of the various ETFs, you know…those things investors don’t read, provides the answers.

I first brought this issue to the public’s attention in my book, “Buy Gold and Silver Safely” where I outlined this non-insurance risk by the ETFs. The following information comes straight from the prospectus of the largest gold and silver ETFs (emphasis added).

SPDR Gold Trust symbol GLD p.9

Sponsor: World Gold Trust Services

Custodian: HSBC Bank USA, N.A.

The Trust’s gold may be subject to loss, damage, theft or restriction on access. There is a risk that some or all of the Trust’s gold bars held by the Custodian or any subcustodian on behalf of the Trust could be lost, damaged or stolen. Access to the Trust’s gold bars could also be restricted by natural events (such as an earthquake) or human actions (such as a terrorist attack). Any of these events may adversely affect the operations of the Trust and, consequently, an investment in the Shares.

The Trust may not have adequate sources of recovery if its gold is lost, damaged, stolen or destroyed…

The Trust does not insure its gold. The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate. The Trust is not a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage.

Therefore, the Custodian may not maintain adequate insurance or any insurance with respect to the gold held by the Custodian on behalf of the Trust. In addition, the Custodian and the Trustee do not require any direct or indirect subcustodians to be insured or bonded with respect to their custodial activities or in respect of the gold held by them on behalf of the Trust.

Consequently, a loss may be suffered with respect to the Trust’s gold which is not covered by insurance and for which no person is liable in damages.

iShares Gold Trust symbol IAU pp.1,10

Sponsor: Black Rock Asset Management

Custodian: J.P. Morgan Chase, London Branch

The Shares are not interests in or obligations of the sponsor or the trustee. The Shares are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

The value of the Shares will be adversely affected if gold owned by the trust is lost or damanged in circumstances in which the trust is not in a position to recover the corresponding loss.

The responsibility of the custodian for loss or damage to the trust’s gold is not unlimited. The agreement with the custodian contemplates that under certain circumstances the custodian will not be responsible for loss or damage to the trust’s gold in the custodian’s possession. For example, losses due to nuclear accidents, terrorism, riots, acts of God, insurrections, strikes and similar causes beyond the control of the custodian will be sustained by the trust. Any loss of gold owned by the trust will result in a corresponding loss in the NAV and it is reasonable to expect that such loss will also result in a decrease in the value at which the Shares are traded on the NYSE Arca.

Author’s note: There is no mention of the word “stolen” in the prospectus. Naturally, any “loss” would apply to any stolen gold and thus result in a corresponding loss in the NAV.

iShares Silver Trust symbol SLV pp. 1, 10

Sponsor: Black Rock Asset Management

Custodian: J.P. Morgan Chase, London Branch

The iShares are not interests in or obligations of the sponsor or the trustee. The iShares are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

The value of the iShares will be adversely affected if silver owned by the trust is lost or damaged in circumstances in which the trust is not in a position to recover the corresponding loss.

Author’s note: This is the same language and circumstances mentioned above from the IAU prospectus.

ETFS Gold Trust (ETFS Physical Swiss Gold Shares (Shares)) symbol SGOL p. 9, 10

The Trust may not have adequate sources of recovery if its gold is lost, damaged, stolen or destroyed.

The Trust will not insure its gold. The Custodian will maintain insurance with regard to its business on such terms and conditions as it considers appropriate in connection with its custodial obligations and will be responsible for all costs, fees and expenses arising from the insurance policy
or policies. The Trust will not be a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage.

Therefore, Shareholders cannot be assured that the Custodian will maintain adequate insurance or any insurance with respect to the gold held by the Custodian on behalf of the Trust. In addition, the Custodian and the Trustee will not require the Zurich Sub-Custodian or any other direct or indirect subcustodians to be insured or bonded with respect to their custodial activities or in respect of the gold held by them on behalf of the Trust.

Further, Shareholders’ recourse against the Trust, the Trustee and the Sponsor, under New York law, the Custodian, the Zurich Sub-Custodian and any other subcustodian, under English law, and any other subcustodians under the law governing their custody operations is limited. Consequently, a
loss may be suffered with respect to the Trust’s gold which is not covered by insurance and for which no person is liable in damages.

ETFS Silver Trust (ETFS Physical Silver Shares) symbol SIVR p.9

Sponsor: ETF Securities USA LLC

Custodian: HSBC Bank USA, National Association

The Trust will not insure its silver. The Custodian will maintain insurance with regard to its business on such terms and conditions as it considers appropriate in connection with its custodial obligations and will be responsible for all costs, fees and expenses arising from the insurance policy or policies. The Trust will not be a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage.

Therefore, Shareholders cannot be assured that the Custodian will maintain adequate insurance or any insurance with respect to the silver held by the Custodian on behalf of the Trust. In addition, the Custodian and the Trustee will not require any direct or indirect subcustodians to be insured or bonded with respect to their custodial activities or in respect of the silver held by them on behalf of the Trust. Further, Shareholders’ recourse against the Trust, the Trustee and the Sponsor, under New York law, the Custodian, under English law, and any subcustodians under the law governing their custody operations is limited.

Consequently, a loss may be suffered with respect to the Trust’s silver which is not covered by insurance and for which no person is liable in damages.

So when purchasing gold and silver, or if you already own gold and silver ETFs, it pays to know there are risks of ownership in the case of them not being insured. When the financial media uses this as a reason not to own physical gold and silver it is pure bias. You now know the facts, straight from the prospectus. In addition, also understand the custodians of these ETFs are banks, and they have their own issues.