re: increasing margins for gold, silver
http://etfinvestor.com/article/9750
Market Participant submits: With all the hoopla about the introduction of the iShares Silver ETF (SLV), investors seem to have forgotten a big gaping flaw in the design of all the metal ETFs.
None of the metal ETFs own any income producing assets. Metal itself is dead, and therefore fund expenses — 0.40% for (GLD) or (IAU), 0.50% for (SLV) — are taken from the ETF’s bullion holdings. Every day the amount of gold or silver backing an ETF share shrinks. As the silver ETF’s Prospectus helpfully explains:
The trust sells silver to raise the funds needed for the payment of the sponsor’s fee […] and all trust expenses or liabilities not assumed by the sponsor. The purchase price received as consideration for such sales is the trust’s sole source of funds to cover its liabilities.
For example, on Jan 03 2006, each share of streetTRACKS Gold Trust (GLD) held 99.552% of 0.1 troy ounces of gold. Today on April 27 2006, each share of GLD holds 99.433% of 0.1 troy ounces of gold. On GLD’s inception date November 18th 2004, each share held 100.00% of its starting NAV. You can watch your GLD vanish on the official streetTRACKS website.
An commodities fund like DB Commodity Index Tracking Fund (DBC) or United States Oil Fund LP (USO) that uses futures does not have this problem because interest from the bonds deposited as margin for future contracts is used to pay fund expenses and offset losses due to contango.
A simple solution for NAV erosion is for the gold and silver ETFs to lend their bullion and collect “leasing” fees. The fees would be used to offset fund expenses and increase fund assets/pay dividends over time. Alternately each share of an ETF could consist of metal and a preferred share of a trust that invests in treasury bonds/mortgages/TIPS — i.e. each share of GLD would consist of 0.1oz of Gold and a preferred share of par $10. Income earned by the trust in excess of fund expenses would be paid as dividends on the preferred shares. Whenever a creation transaction occurs, the preferred shares would be redeemed or issued as needed.
Many equity ETF’s lend their securities to short sellers to generate fees from short interest. These earnings are used to offset fund expenses. The current precious metal ETF’s policy of holding only physical bullion and having no source of income requires erosion of NAV to pay fund expenses. This makes metal ETFs questionable as a long term investment or store of value.
