Originally published March 12, 2016 at 8:00 am The Seattle Times Chuck Jaffe
NUcapitals Note: The benefit of buying the actual Silver/Gold is that you don’t have to worry about a scenario like this happening. It is prudent to ask questions and be informed as to how best to invest in hard assets and associated investment vehicles like ETF’s also. Both have a place in a balanced hard asset portfolio but a strategy must be devised. If you need any information please contact us to assist you.
The iShares Gold Trust effectively ran out of shares and needed to register new ones with the Securities and Exchange Commission before it could sell any more.
Demand for gold has been so hot lately that it actually broke a popular gold fund recently.
The circumstances are, if nothing else, weird, but for anyone looking to follow the crowd into gold, there’s a lesson in what happened that reminds investors that there are a lot of options when it comes to putting something glittery in a portfolio, and that all types of fund are not created equal.
The situation was resolved by the opening bell Monday, but it should not be ignored.
Where most gold ETFs hold gold-mining stocks and gold-related investments, IAU holds physical gold.
Technically, that makes it an “exchange-traded commodity,” and means it is covered by different rules than most funds.
The standard fund or ETF operated under the Investment Company Act of 1940, which allows for continuous creation of shares; an exchange-traded commodity would operate under the Investment Company Act of 1933, under which a fund company has to file additional registrations in order to issue more shares.
While the IAU — which iShares reported as having $8 billion in assets — was taking in some $1.4 billion year-to-date, and in the middle of its largest period of share creation in the last decade, someone at the company apparently didn’t get the new registrations handled in time, and the fund ran out of shares.
That said, with the status of IAU uncertain, investors might gravitate toward its rival, the SPDR Gold Shares (GLD), despite a higher expense ratio.
The situation with IAU should not have investors reconsidering gold, but they shouldn’t buy the fund until new shares are created and prices normalize.
Meanwhile, investors should be thinking about what they want when it comes to gold holdings.
While owning the precious metal directly or in the IAU or GLD is an option, a gold fund is an alternative; anyone late to the current run on precious metals should know that the metal typically rises in price before the mining companies do, so someone coming late to the current rally might prefer a traditional gold fund.
“It’s a very volatile sector and typically in the second quarter we see retracements, step-backs from gains that happen at the start of the year,” said Thomas Winmill, manager of the Midas Fund (MIDSX). “At this level, with this kind of run-up and volatile movement, investors want to be careful, and probably should be allocating less than 5 percent [of their holdings] in gold. … There will be opportunities to buy gold at better prices, but right now investors want to be careful.”
They should at least be careful about the kind of fund they’re getting and should know how it’s being affected by the current gold rush before they buy it.