Comments (14)

• Steven Kane

  This is great news! These ETFs are liquid, and can be traded at a low cost. This is going to bring us one step closer towards a commodity based currency. The next phase that we will probably see is people abandoning savings accounts at the bank, and directly investing in safe commodities such as gold, at a very low cost. At that point, people's savings will only turn into fiat at the moment that they want to purchase something. This will severely hinder the government's and the bank's ability to inflate.

  Published: November 12, 2004 1:52 PM

• bob

  the Central Fund of Canada has been around since 1986

  its been an option to physical gold and a good gauge to investor psychology

  in Oct 2000 as gold was in the process of making its 30 yr bottom....the fund traded at a 16% discount to its NAV

  the psychology was so poor on gold that investors were willing to give away bullion at a 16% discount just to get out

  today the fund trades at a 5% premium and has average a 12% premium on the year.....

  the launch of the ETF is a reflection of this positive psychology.....this is the phase where the public shows up....and ultimately gets hurt

  Published: November 12, 2004 2:40 PM

• David Heinrich

  The funny thing about the "premium" that ETFs now trade at is that you'll hardly fine one company in the stock-market that's trading at a premium that low above their assets. Amazon.com certainly isn't trading at a premium of only 12% over their tangible assets. Granted, people consider intangible assets, but it's just a point. I think gold ETFs will be a great thing for investors -- an easy quick way to own gold/silver, and also very liquid, and something you can buy in a retirement plan.

  Published: November 12, 2004 5:42 PM

• Tom Whiston

  When you buy into a gold ETF, what do u actually own? Can I liquidate my shares for gold? Or do I own a contract? If anyone could explain or point me to an article on exchange traded funds, it would be appreciated...thanks

  Published: November 13, 2004 11:30 AM

• Steven Kane

  Tom:
  ETFs are like mutual funds that are traded like stocks, and are broken up into shares. Each share is basically a "chunk" of of a big fund. In the case of gold ETFs, I imagine that for some of them you would be investing directly in gold bullion, so the value of the ETF at any given time would closely match the spot price of gold. Other gold ETFs might be invested in a combination of bullion, gold mining stocks, or other investments related to gold.

  If you go to sharebuilder.com you can start buying ETFs for only $4 a trade.

  Published: November 13, 2004 12:31 PM

• David Heinrich

  Tom,

  It depends on the ETF. You have to read the prospectus and other information of the ETF. The Gold ETF Page is a good starting point. Do not bother with Perth, they're a fractional reserve system. You can find out about the ETFs by clicking on the links under Gold Bullion Exchange Traded Securities.

  Published: November 13, 2004 1:21 PM

• Steven Kane

  David: Does the Perth Mint really operate on fractional reserve? In any event, I would NOT trust the government with my gold. In fact, I read a story not to long ago that the Australian government basically seized a man's gold at the Perth Mint.

  From the Kitco page for Perth Mint certificates:

  "Perth Mint precious metals certificates are government guaranteed and have no storage fees."

  Whenever you see the phrase government guarantee, run away as fast as you can!

  Published: November 13, 2004 6:10 PM

• David Heinrich

  Steven,

  From what Robert Blumen tells me, it's basically a fractional reserve.

  Published: November 13, 2004 9:47 PM

• Jardinero1

  Could someone explain the disdain for fractional reserves. I mean how is someone supposed to get a loan if not for fractional reserves?

  The US economy has 38 trillion in loans outstanding, GDP is about 11 trillion per year. That's nearly four years of growth on borrowed money. Can you imagine what would happen to the economy if suddenly no one could get a loan... and we had to wind down all that debt?

  Pray it never happens.
  

  Published: November 17, 2004 10:31 AM

• Gil Guillory

  Jardinero1,

  The Austrian case against (and to some extent, debate over) fractional reserve banking is a large topic, not to be dealt with easily in a comment section. A good starting point might be Rothbard's book "What Has Government Done to Our Money", available on this site.

  And, thanks to the new media server, I also direct your attention to the documentary "Money, Banking, and the Federal Reserve", available on this site.

  But, as a brief answer to your two questions:

  1. What's wrong with fractional reserves? It is unjust to loan to another person goods you claim to be warehousing for them, and this creates other bad effects (e.g., business cycle).

  2. How would loans work without fractional reserves? People would make time-deposits, most likely in the form of certificates of deposit; and these monies would be loaned to people.

  Published: November 17, 2004 10:44 AM

• Jardinero1

  "People would make time-deposits, most likely in the form of certificates of deposit; and these monies would be loaned to people."

  That sounds like a fractional reserve only the fraction is one over one. The proper term for what you described is actually "structured finance" and that is how most of the 38 trillion in loans originated. There is no difference between the two; you are re-loaning all or some of the money someone loaned to you.

  "It is unjust to loan to another person goods you claim to be warehousing for them"- a contract is unjust if both parties don't know or understand all the terms. Everyone knows when you make a deposit or buy a CD that the money will be loaned to someone else and deposited and loaned to someone else ad infinitium. Most kids learn this in the tenth or eleventh grade.

  Published: November 17, 2004 1:08 PM

• Gil Guillory

  "That sounds like a fractional reserve only the fraction is one over one."

  Hence, it is not a fraction, but a wholly-backed pool of loaned funds. This is sometimes called 100% reserve banking.

  "Everyone knows when you make a deposit or buy a CD that the money will be loaned to someone else and deposited and loaned to someone else ad infinitium."

  This is true today, but in the history of banking there is a much more varied understanding of the nature of the contract between banks and their depositors. If you'd like to continue to discuss this in more depth, then contact me via email.

  Published: November 17, 2004 1:32 PM

• Jardinero1

  "Fractional Reserve" means you retain a fraction(to hedge against bank runs) and loan the rest. If I read you correctly you are saying you will loan the entire amount out? That's not one hundred percent reserve that's zero percent reserve.

  Published: November 17, 2004 2:07 PM

• Gil Guillory

  100% reserve banking means that one functionally separates the activities of banking. Demand deposits, which can be withdrawn at any time, are 100% backed -- none are loaned out. Demand deposit accounts would not, therefore, earn interest but would require fees from depositors for their maintenance. Time deposits, such as certificates of deposit, would be given for definite times, would pay interest to the depositor, and would be a pool of loanable funds.

  Demand deposits would entail no other risk than that of theft. Time deposits would additionally entail loan default risk. 100% reserve demand deposits could be insured against theft on a free market. Time deposits could not be.

  I might further note that free banking would tend toward 100% reserve banking. There is a debate among Austrians whether a free banking system would come to completely eschew fractional reserve banking, or whether under a regime of free banking fractional reserve banking would still be practiced, and whether and to what extent notes from fractional reserve banks would circulate at a discount.

  Again, this site is full of stuff by Rothbard and many others on the topic. There are whole debates in the RAE and QJAE, and many books. If you have a unique position, I recommend writing a well-referenced article.

  Published: November 17, 2004 2:43 PM