Mar 012010
This is a fantastic article highlighting the problem with ETFs and other investment funds that invest in unallocated gold.
Essentially, some funds use investor money to buy certificates that represent an unsecured claim with a counterparty. Because the claim is unsecured, and because the claim is rarely exercised, the counterparty may never actually hold enough gold to pay off all the claims at once. [Some might notice that this was precisely one of the origins of fiat money hundreds of years ago.]
Now imagine that investors decide to redeem their fund certificates for gold all at once (i.e. a run on the ‘bank’)…
Alchemists Turn Paper Into Gold
