GLD & TLT: Exploring the Dark Side of Exchange Traded Funds (ETFs) With Lauren Lyster at Capital Account

EB's picture


Submitted by Bob English (EB) of


Exchange Traded Funds (ETFs) have become as ubiquitous to investor portfolios, including retirement accounts, as their cousins in the mainstay mutual fund universe.  Yet, few are apprised of the differences between these two asset classes.  ETFs often have lower costs, are more tax efficient, and can be shorted (much to the delight of Mr. Chanos), while mutual funds may offer greater investor protections under the Investment Company Act of 1940.  The latter is a subtle point worth exploring because, as the the half life for the next Fed-induced bubble happily converges with the six month mark on Mr. Bernanke's QE3, these things never matter...until they do (which is when the inevitable Fed brakes foment a crisis).


With the help of the host and producers at RT Network's Capital Account, we will explore just what can (and if one believes in such platitudes as Murphy's Law, will) go wrong when the next BearStearnsLehman cluster occurs, with particular attention to the world's largest gold ETF, GLD (thanks to Ms. Lyster) and the world's "safest" U.S. long bond ETF, TLT.


From Capital Account:


[If embed does not work, click here:]


The partial transcript:

Time now for Word of the Day where we break down a financial term for our smart viewer but maybe not the financial expert. Today it's ETF or Exchange-Traded Fund. By attracting those looking to invest in nontraditional assets and sectors, the global ETF market has inflated to more than a trillion dollars in assets over the past few years...some put that number now at about 2 trillion dollars. David Kotok wrote a book on ETFs and spoke about them on our show recently. However, Kotok warns that investors should conduct serious research before purchasing shares in an ETF. We'll explain why shortly, but first, what exactly is an Exchange-Traded Fund (ETF)? Here's our definition: 

ETFs are a portfolio or basket of securities, which provide diversification like mutual funds, yet are unique in that they trade on an exchange just like a common company stock. They usually track an index, either holding the underlying stocks of the index or using derivatives to achieve the same returns as the index. And since an ETF is designed to track a specific market index, one can play an entire sector without being forced to stomach the volatility inherent in any one stock.

For instance, investors can gain exposure to precious metals using ETFs. Specifically, Gold and gold miner ETFs have become increasingly popular. But if you buy shares in a gold ETF like the GLD for example, the largest gold ETF in the world, do you actually own gold? The answer is NO. You are effectively buying shares in a fund indexed to the gold market. This is not the same thing as buying physical gold bullion and storing it in allocated vaults, a key distinction. 

Here (at the 2:30 mark), it's worth viewing "internationally acclaimed financial expert," Suze Orman play down (if not completely misrepresent) the virtues of owning physical gold.  Contrary to the guru's advice, no: not all physical gold must be re-assayed prior to sale (if one sticks to smaller, well known coins and is not buying from this guy).

In fact, according to the ETF's own prospectus, the average investor can only redeem his or her gold shares for cash. Only those who have large holdings in a fund like GLD have the option to redeem their shares for physical gold, requiring somewhere in the neighborhood of 100,000 shares, which translates into millions of dollars. And even then it's a complicated process.  

Building on the prior "allocated vaults" reference by Ms. Lyster and the redemption comment above, we would add that GLD itself does, in fact, maintain physical gold in allocated accounts (meaning numbered bars are held (allocated) in trust for the fund and cannot be seized in the event of bankruptcy of the custodian or storage provider).  Yet, according to its prospectus, GLD maintains an unallocated gold account for purposes of creation and redemption of fund units--that is, if a very large investor wishes to put physical gold into the fund or take it out, there is a three day limbo period (which can be extended by the fund manager) where the gold sits in an unallocated account, fully exposed to counterparty risk.  More on this in a bit.


Ms. Lyster continues:

Also, in the case of GLD, the Trust does not insure its gold. Which means it may not have adequate sources of recovery if its gold is lost, damaged, stolen or destroyed. And this may surprise you when reading the prospectus as we have. According the prospectus for GLD: 

"The amount of gold represented by the Shares will continue to be reduced during the life of the Trust due to the sales of gold necessary to pay the Trust's expenses irrespective of whether the trading price of the Shares rises or falls in response to changes in the price of gold."  


"Gold held in the Trust's unallocated gold account and any Authorized Participant'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." 

So if the custodian- in this case HSBC- runs into trouble, it may not be able to make good on your claim.  

Accordingly, we might imagine a crisis situation in which substantial redemptions (requests for physical gold by large holders) drain the gold from the GLD allocated account to the GLD unallocated account, wherein the redeemers are exposed to substantial counterparty risk in a narrow, yet strategic window in time.  And, if anyone thinks we're prone to paranoia (which is possible), please search our blog for "MF Global JP Morgan."  Because when the music stops and the bankruptcy papers are filed, only the last TBTF bank standing matters and is free to seize the booty (thank you Sen. Grassley).

So it would appear the only way to protect yourself as an investor when it comes to ETFs is to do detailed research on the fund, its assets, and carefully read its prospectus, and even then you are still dealing with counterparty risk. This is why some would argue that buying a gold liability, which is what a gold ETF is, defeats the purpose of owning gold in the first place, as precious metals are one of the few asset classes accessible to average investors that are not simultaneously another person's liability.  

In any case, now you know about ETFs and if you're interested, you know to get your reading glasses ready to dissect the fine print.

[Ms. Lyster exits, stage left.] 

Read the prospectus, indeed.


But if one needs another example, consider the case of TLT, the BlackRock-managed 20+ Year [US] Treasury Bond ETF.  Used by Treasury bulls and hedgers alike, it is one of the more popular and liquid ETFs since its inception in July 25, 2002 (registered ex nihlo vis a vis an SEC No Action Letter, thus, bypassing the usual SEC registration and review process).  Nevertheless, it does have a current prospectus, which governs the principal investment strategies:

The Fund generally invests at least 90% of its assets in the bonds of the [Barclays US Treasury] Underlying Index and at least 95% of its assets in U.S. government bonds.  The Fund may invest up to 10% of its assets in U.S. government bonds not included in the Underlying Index, but which [BlackRock Fund Advisors] BFA believes will help the Fund track the Underlying Index.  The Fund also may invest up to 5% of its assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates. 

So far, so good, despite the nebulous term "generally invests." The "up to 5%" investment in repos, cash and affiliated money market funds seems minimal and reasonable.  But, then if we look at the Schedule of Investments in the last annual report, why is there a materially higher amount (36.01%) invested in affiliated, BlackRock money market funds?


The prospectus does state that, "The Fund may lend securities representing up to one-third of the value of the Fund's total assets (including the value of the collateral received)."  Note that "total assets" is 35.27% higher than "net assets," a clever trick with definitions.  But this does not explain everything.


From here, we need to read the Statement of Additional Information (yes, another, separate document), which is incorporated by reference into the prospectus, and which contains more detailed disclosures (emphasis ours):

With respect to loans that are collateralized by cash, the borrower will be entitled to receive a fee based on the amount of cash collateral.  The Funds [sic TLT] are compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to the borrower.  In the case of collateral other than cash, a Fund is compensated by a fee paid by the borrower equal to  a percentage of the market value of the loaned securities.  Any cash collateral may be reinvested in certain short-term instruments either directly on behalf of each lending Fund or through one or more joint accounts or money market funds, including those affiliated with BFA; such reinvestments are subject to investment risk.  BFA may receive compensation for managing these investments of collateral.

Putting it all together, TLT may lend up to 33.33% of its total assets for cash, then invest that cash in BlackRock money market funds.  Throw in the extra 5% for repos, cash and money market funds, and a total of 38.33% in money market funds is permitted (so the 36.01% investment is entirely legal).


Is this nefarious?  Not quite, but it gets back to what happens in a crisis.  While money market funds are ordinarily safe, one need only recall Lehman circa September, 2008 when the entire asset class locked up thanks to a freeze in the repo market after the greatest Fed-induced liquidity whipsaw in history.  Presumably, the Fed and other "regulators" are prepared for that contingency.


Yet, the Fed itself has set up money market funds as a key prong in its future Whip Inflation Now tightening operations, when it must enact tightening policies to soak up the trillions in excess reserves it has created thanks to numerous "QE" programs.  Recently revived contemplated regulatory changes may also allow money market funds to suspend redemptions.


So, in a pinch, what happens when markets lock up and Treasury fail-to-delivers (FTDs) prevent a return of the lent securities to TLT, and/or the cash invested in BlackRock money market funds is locked up thanks to a combination of redemption suspension and the Fed itself competing for its cash?  While the official net asset value of TLT may not be affected thanks to accounting guidelines, just how wide (and lower) might TLT trade in the secondary market (on exchanges, where most investors buy and sell), as investor confidence shatters?


While we're not trying to fear monger, the point of this exercise is twofold: one, before investing in an ETF, read and understand (with the help of a professional, if necessary) all the fund documents and at least the most recent financials, including the notes.  Two, perhaps consider all ETFs as an asset class when abiding by the 10% concentration rule.


Good luck investing, ladies and gents.

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sgorem's picture

If it's PAPER, it's only good to wipe your sorry ass with. When is this piece of shit Titanical Zeppelin gonna crash, burn, and sink to the bottom of the cesspool?  The US politicos', aka, The Global Banking Cartoon have plundered the world for decades, if not centuries. What we need is a good old fashioned REVOLUTION stringing some of the assholes up along with their cronies. (maybe Tar & Feather would also work here)! Fuck em all, and anyone who believes their lies. Just BTFD & move along.

UP4Liberty's picture

There's a lot I'd like to explore with Lauren Lyster - and it has nothing to do with an ETF...

Or maybe on second thought...if ETF stands for an "Extremely Taut Fanny" - then I'm all IN!

Just sayin'...

SAT 800's picture

Let's keep this nice and simple, OK? I've been trading in major markets since 1979; Just as an individual, and I'll just tell you, there aren't any individual investors who need any ETF's. Okay? that's it. They were invented as a "product" for the salesmen to hustle at the brokerage firms; you don't need them, you don;t want them; they offer nothing you can;t do in other more direct ways. So, just like Nancy Reagan; just say No.

apberusdisvet's picture

If you are a reader of Harvey Organ's blog, you will note that either GLD or SLV have seemingly no problem obtaining millions of ounces on short notice, while it takes everyone else months to receive volume orders.  This is indicative that both ETF holdings are  BS; there are no big stashes around anymore since all the reported recent volume purchases have recent mint marks.

CPL's picture

Gold foiled tungsten for the Win!!

Count de Money's picture

I while back I read the GLD prospectus and one thing I believe is incorrect is that a large investor can redeem their shares in gold. The only people who can redeem in gold are the "authorized participants". These are all the large Wall Street investment banks such as Goldman, Deutsche Bank, UBS, Barclays, etc. Investors in GLD can only settle in cash. What GLD investors don't realize is that they're bankrolling the gold trading desks of Wall Street.

What's worse is that the amount of gold represented by each share has been steadily eroding due to expenses paid to the custodian, which happens to be HSBC (in mafia lingo, this is called "the skim"). At inception, each share of GLD represented 1/10 oz of gold. Yesterday, each share represented 0.0969496 oz.

And don't get me started on the frontrunning that goes on in GLD.

EB's picture

That's basically correct.  Here's what it takes to be an Authorized Participant (ctrl-c disabled for the pdf):

Having said that, an individual large investor can contract with an Authorized Participant to redeem on his/her behalf.  See this post by FOFOA:

Thisson's picture

It's important to note that one is legally permitted to breach a contract.  So if you were to contract with an Authorized Participant for redemption, they could breach their obligation to you.  Your recourse would be to the legal system, and if your lawsuit was successful, you would be entitled to money damages as compensation.  NOTE: this means paper fiat money - Federal Reserve Notes.  You would most likely not be entitled to the actual gold.  You could try to obtain "specific performance,"  but this is an extremely disfavored remedy and is very difficult to obtain.  Moreover, in a crisis, the party you seek recourse from may be insolvent and unable to deliver either the money or to perform its redemption obligations.

Count de Money's picture

Thanks for the info. Although I'm not in a position to take advantage of it. LOL.

Interesting that the article confirms something I discovered about a year ago. There is a hell of a correlation between the amount of gold in GLD and the price of gold. And GLD has a lot of gold. If GLD was a country, they'd have the sixth largest reserves in the world. This tells me that GLD, more than anything else, is what is supporting gold at these prices. In fact, GLD was alleged to be created to bump up the price of gold by making it relatively easy and cheap to buy. In other words, to goose demand.

The sponsor of GLD is the World Gold Council. Who is the WGC?

Cui bono, indeed.

Bay of Pigs's picture

Nobody knows how much gold they have. They certainly do not have the sixth largest reserves in the world. And GLD has siphoned off billions of dollars that used to flow into the miners. I'm amazed so many people have this completely backassward.

GLD and SLV are two of the biggest bankster frauds going today. 

new game's picture

susie the sheep herder,  imagine how many opera viewers took that advice.

dumb, dumber and mfing dumber than mfing dumb mfer.


Cult of Criminality's picture

Susie organ is not to smart for a financial advisor.

Lauren is just right.

Manthong's picture

Susie or man is a preference call for her lady friends.

Lauren makes evening finance topics a treat.

ebworthen's picture



"Gold held in the Trust's unallocated gold account and any Authorized Participant's unallocated gold account will not be segregated from the Custodian's assets."

Corzine Clause.

Manipulism's picture

it is called corzinisation of Gold.

gregga777's picture

In plain English: When you most need the gold, represented by your share holdings in the Gold ETF, it will not be there. You will be screwed!

What is so difficult to comprehend in that?

Manthong's picture

All PM ETF's but Sprott are for trading and gambling (and for options leverage).

Sprott is a hedge that should stand when SLV and GLD blow up, but there is always a counter-party risk with anything you do not have in your own hands.

Funghi's picture

What's wrong with CEF and GTU?

philosophers bone's picture

Sprott Physical Funds don't hedge.  Not only will the Sprott Physical Funds stand when SLV and GLD blow up, but they will flourish as investors go running into them.  Yes, there is a premium to NAV, but if you're investing in a registered account, they are convenient.  I don't mind standing with Eric Sprott when the shit hits the fan.  Outside of registered accounts, I do like physical PMs better, but where the hell do you put silver bars.  Those cheap tin safety deposit boxes at the banks can't hold shit.

New World Chaos's picture

Question:  Can Sprott's funds be naked shorted?

Does being in Canada make them immune from skulduggery at the DTCC? 

I suspect that the puppetmasters will ensure they have a legal way raid the fund.   If they can't redeem real metal with shares "borrowed" from unsuspecting investors, they will get the Canadian government to go along with an American confiscation order.

Still, if I was locked into NoTTD's retirement plan, the best horse in the glue factory would be physical PSLV certificates buried in the backyard.

NoTTD's picture

The Spott ETFs along with CEF and GTU, have been good vehicles for my retirement fund which, due to fed regulations (KEOGH), does not allow holding physical.   These are as good as it gets in this situation.  I wouldn't touch GLD/SLV with a ten foot pole after reading the prospectus.

Funghi's picture

Why are the Sprott funds any better than CEF and GTU?

NotApplicable's picture

I own some CEF, so my guess is Tungsten (at least, eventually).

Manthong's picture

Yes, I mean personal hedge.. a fiat vehicle anchored in physical against other system stuff.

And there may be some value in not being in the former Constitutional Republic of the United States.

jb.mcmunn's picture

GLD is the worst of both worlds. In addition to the questionable nature of its physical holdings, it is set up as a grantor trust so you get taxed at the 28% collectible rate of physical gold on profits, no matter how long you hold the shares. At least with CEF and GTU you can file forms with the IRS so that long term profits are taxed at the long term capital gains rate.

devo's picture

you get taxed at the 28% collectible rate of physical gold on profits

Yes, but not in an IRA. That's how I set it works nicely.

akak's picture


you get taxed at the 28% collectible rate of physical gold on profits

No you are not!

This is one of the most widely repeated bits of financial misinformation (disinformation?) on the web today.

In fact, one pays a 28% income tax rate on profits from gold and silver ONLY if their normal income tax rate has already reached or exceeded that 28% level.  For those of more modest income, their profits will only be taxed at their prevailing, lower tax rate.

CPL's picture

Correct. Unless capital gains are recognized as a safe haven I'm not entirely sure what government doesn't tax the gross income for a financial year.

GrinandBearit's picture

Not on pre-1933 phyz you don't.  :o)

Sofa King Confused's picture

I'd like to Explore The Dark Side of Lauren Lyster

devo's picture

I'd give her all my gold for one night of that...

(If I were single, of course!)

Likstane's picture

I'd give her all my GLD for one night of that....

fixed it for you.

SAT 800's picture

I'd like to help. I could be an apprentice explorer.

CompassionateFascist's picture

Lyster is reputedly a Tribal. She may get a page of her very own @

gregga777's picture

It is good to see that you keep your wits during a crisis.

Quinvarius's picture

No Bob Pisani references?

SoundMoney45's picture

Precious metals ETFs are trading vehicle, not an investment vehicles.  

EB's picture

That's what they should be considered, yet ETFs, including GLD, populate 401Ks for years at a time.

Anyone care to guess the composition of the Bank of Israel's US ETF portfolio?

devo's picture

They are obviously garbage, but I buy SLV on dips and convert to cash to fund my long-term food storage. For that, I thank them.

Crash N. Burn's picture

Do they still charge "storage fees" for metal they will never deliver (as in this CNBC clip)?


Silver breaks $43 an ounce – Lets get physical
CompassionateFascist's picture

Please. The whole purpose of GLD and SLV is to dilute the demand for real PMs, hold down the price of same, and support the PaperPonzi regime. I used to be in SLV. Not any more. Bullion in a vault now, and will shortly be converting that into home-held Silver Eagles: security via M1a.

devo's picture

I'm talking about short-term SLV holdings to book a profit and load up on food. If the money was just going to sit and do nothing, it is better to buy those dips in SLV and take advantage. The idea that nothing paper serves a purpose is short-sighted. Since people still accept paper, it is wise to take advantage of the current system and use any vehicle you can to load up on it and convert it into something tangible (e.g. food). I live in a grey world, not black and white. I understand the need for PMs, but the world you're envisioning where they're the only thing of value hasn't yet materialized (not saying it will or won't...I think this could go either way), so I play both sides and adjust as needed. If I have cash in an account and SLV dips there is absolutely nothing wrong with taking advantage of that. I wasn't going to buy physical silver with that money anyway, since I already have enough, and I'd rather convert the paper profit into food than more metal. What people do probably depends on their situation. This strategy makes sense for me and my situation.

Thisson's picture

You are a retard.  The sponsor of GLD is the World Gold Council, who want to boost the price of gold.  That is the purpose of GLD - to make gold easily accessible to more investors, boosting demand, and boosting prices - not lowering them.

I could overlook your idiocy if you weren't such a loud-mouthed bigot as well.  Please go back to whatever neo nazi hole you crawled out of.

CompassionateFascist's picture

@ the Ponzi-scheming Thisson: "bigot"? My attitude toward the JP, which is based on geometric logic and overwhelming facticity, is also congruent with that of Christ, Voltaire, Wagner, C.G. Jung, Herzl, Philip of Spain, El Cid, Frederick Barbarossa, T.E. Lawrence, Ben Hecht, Schumpeter, Charles Lindbergh, K. MacDonald, Beethovan, Mozart, Arnold Toynbee, Celine, Roald Dahl, William Shakespeare, T.S. Eliot, St. John Chrysostomos, Caesar Augustus, Flavius Josephus, Joe Sobran, Lawrence Durrell, Ben Franklin...and, indeed, about 2/3 of the men who created that Western Civilization which is currently being destroyed by the machinations of Organized Jewry & assorted shabbatz goyim. Thank you.  

Crash N. Burn's picture

Ya mean this World Gold Council:


"For those not familiar with the WGC, it is an “industry trade group” composed of large-cap gold miners who love bankers.

How much do these mining companies love bankers? So much that they allow the bankers to keep all the records for their sector, and pretty much do all of their of their promotion to the world. It is the WGC which elevated two private “consultancies” (of bankers) – GFMS and the CPM Group – to the status of quasi-official record-keepers for the entire global gold (and silver) industry.

It would be problematic at best for the gold industry to allow itself to be almost entirely represented by a “profession” now known only for its rampant fraud. However, given the known hatred of the banking community toward gold and silver, and their relentless attacks on both the bullion market and the miners themselves; it’s almost beyond comprehension that the world’s largest gold miners choose bankers as their spokesmen."


Gold Supply-Crisis Looms?
akak's picture

Thisson, it is you who is intellectually challenged here, and the poster to whom you responded is almost certainly exactly correct.

The World Gold Council is a well-known front for those who wish to diminish and disparage the concept and function of gold as a monetary asset, as witnessed by their years-long efforts to highlight gold as a physical commodity and NOTHING more than that.  Their annual reports are hopelessly biased and compromised by their fundamentally anti-gold-as-money, pro-financial-status-quo biases --- which is precisely why bankster shills such as Jeffrey Christian and the execrable Jon Nadler simply love to quote their reports and "data" so often.

Wake up.

Bay of Pigs's picture

I've tried to talk to Thisson about the WGC, GLD and SLV for a long time now. He's totally stuck in the Wall St Bankster paradigm. He even says the COMEX is totally legit.

Epic Fail.