Gundlach Sounds Alarm on ‘Paper Gold’ ETFs Raking in Billions

(Bloomberg) Jeffrey Gundlach has a warning for investors piling into gold-backed ETFs: Don’t think you’ll get the physical metal back.

State Street Corp.’s $50 billion SPDR Gold Shares ETF, ticker GLD, attracted $2.9 billion of inflows last week, its biggest haul since 2009, as haven demand amid escalating coronavirus fears boosted the metal. Meanwhile, assets in gold ETFs climbed to a record on Tuesday, according to data compiled by Bloomberg.

The demand for such ETFs is flashing a warning sign for DoubleLine Capital’s chief investment officer, who cautioned against the products during a webcast Tuesday. While ETFs such as GLD are backed by physical gold, the process for an individual investor to acquire the actual bullion isn’t as simple as selling shares of the ETF. “Paper gold” ETFs are little more than speculative vehicles, Gundlach said, and buyers should be aware that holding shares doesn’t amount to having gold bars.

“What happens if physical gold is in short supply and everyone wants to take delivery of their paper gold?” Gundlach said. “They can’t squeeze blood out of a stone.”

The process of swapping GLD shares for physical gold sits “outside of normal dealings,” according to State Street Global Advisors head of ETF research Matthew Bartolini. Bank of New York Mellon, the fund’s trustee, doesn’t interact with the public but only with middlemen known as authorized participants -- traders who channel assets in and out of the fund. An investor would have to work with one of GLD’s APs to acquire gold, he said.

“An individual investor wishing to exchange the Trust’s shares for physical gold would have to come to the appropriate arrangements with his or her broker and an authorized participant to receive the gold bars,” Bartolini wrote in an email.

Gundlach said earlier in March that while he was neutral on gold mining companies, the metal would ultimately go higher. The $51 billion DoubleLine Total Return Bond Fund, Gundlach’s mortgage-focused flagship fund, lost 1.3% this year through Monday and returned an annual average 2.6% over five years.

For Bloomberg Intelligence’s Eric Balchunas, that process isn’t necessarily a problem. Most investors buying gold ETFs are doing so to get exposure to bullion’s price movement, rather than to acquire physical gold, he said.

“The problem with getting physical gold is you’ve got to insure it or keep it in a safe spot,” Balchunas said. “Generally speaking, most people don’t want gold. They want the return stream that gold gives.”


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