The precious metals ETFs are a very high risk to your wealth. There are glaring red flags hidden in plain sight within the prospectus of each that would cause any rationally-thinking person to avoid the precious metals ETFs like the plague.

In this article I will be focusing on the SPDR Gold Trust, which trades under the symbol of GLD. While I will be examining the prospectus of GLD, the same alarming concerns apply to SLV as well. However, the specific reasons to avoid SLV are the focus of another article. Suffice it to say here, though, all of the concerns raised about the dangerous nature of GLD also apply to SLV.

While I hold a very, very strong conviction that precious metals are the absolute best vehicle for protecting and enhancing your wealth in this multi-year financial crisis we are going through,  the same cannot be said for the precious metals ETFs, which are mere paper proxies for the real thing -- and very poor ones at that.

I will outline 3 very major problems within the GLD prospectus. There are others, but these 3 alone should be sufficient. The risks of the precious metals ETFs far outweigh any possible benefit.

All of the following quotes from the GLD prospectus are taken word-for-word, but nonetheless, you should view the prospectus for yourself. You can do so directly from their website: SPDR Gold Trust Prospectus.

1. The prospectus does not guarantee fineness of the gold.

If you buy gold bullion personally, would you not want to know the exact fineness of the gold that your are purchasing? Of course you would. There is a tremendous difference in value between 10k and 24k gold.

The fineness of the gold is critically important to its value. However, on page 11 of the prospectus it states, "Neither the Trustee nor the Custodian independently confirms the fineness of the gold bars allocated to the Trust in connection with the creation of a Basket. The gold bars allocated to the Trust by the Custodian may be different from the reported fineness or weight required by the LBMA’s standards for gold bars."

Neither the Trustee (GLD) nor the custodian (anyone entrusted with holding the trust's "gold") will confirm the fineness of the gold bars being held.

Do you realize the significance of that statement? Since the LBMA regulations for gold require that a good delivery bar "must be" at least 995 parts per 1000 pure gold, with 999.9 being the highest possible quality. Minimum weight is 350 fine ounces, maximum 430 fine ounces, you might assume that some of GLD's bars will contain less than 995 parts per 1000 pure gold.

However, there is no minimum fineness stated in GLD's prospectus. That literally means that a lead bar could be electroplated with 1/64" of gold and meet the requirements of the prospectus of a "gold bar."

Think about that. The SPDR Gold Trust could have thousands of gold bars each weighing 400 ounces, but those "gold" bars could each be 399.95 ounces of lead, and 0.05 ounces of actual gold. These bars would meet the requirements of the prospectus.

Would you ever pay full price for a "gold bar" from a dealer if that gold bar was 99.95% lead? Of course not.

Then why would you allow GLD to do the same thing on your behalf?

2. The prospectus forbids an audit of the gold.

Would you ever choose to use a stock broker if that broker told you right up front that once your funds are placed with the broker, there is no possible way to ever know if the broker is properly executing trades on your behalf as instructed by you? Furthermore, if you had suspicion that the broker wasn't actually executing those trades, (remember Bernie Madoff?) that an audit to reveal the truth was strictly forbidden? Would you actually use a stock broker under those terms? I would hope not.

Well, on page 11 of the prospectus it states, "the Trustee may
have no right to visit the premises of any subcustodian for the purposes of examining the Trust’s gold bars or any records maintained by the subcustodian, and no subcustodian will be obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian."

This is weasel language, crafted by $500 per hour lawyers, that forbids an audit of the alleged "gold bars" being held by subcustodians on "behalf of" the Trust.

The prospectus makes it clear that there can be no visit to the subcustodian premises to examine the gold bars to ensure that they actually do exist. And even it this were possible, (it isn't) as discussed previously, the actual amount of true gold contained in the "gold bars" is not specified nor guaranteed.

So the "gold bars" might be there, but the Trustee is forbidden from actually visiting the locations that the bars are purported to be stored at to verify their existence.

Thanks, but no thanks.

As Ronald Reagan once said, "Trust, but verify." If the prospectus clearly prohibits any audit to determine if the gold bars actually exist, that's all the reason I need to completely avoid that ETF.

3. The "gold" that GLD holds is not insured.

If you had hundreds of millions of dollars worth or artwork, would you insure it against loss from fire, theft, mother nature, or any other threat? Most likely. Likewise, if you had hundreds of millions of dollars worth or gold, would you insure it against loss from fraud, theft, or other threats? Most likely.

Yet, the SPDR gold ETF does NOT insure its gold. Is that not extremely reckless and incredibly risky? On page 9 of the prospectus it states, "The Trust may not have adequate sources of recovery if its gold is lost, damaged, stolen or destroyed
and recovery may be limited, even in the event of fraud, to the market value of the gold at the time the fraud is discovered.

Shareholders’ recourse against the Trust, the Trustee and the Sponsor, under New York law, the Custodian, under English law, and any subcustodians under the law governing their custody operations is limited. The Trust does not insure its gold." (emphasis mine.)

The prospectus clearly states that the alleged "gold" that it holds is not insured. It further clearly states that, "recovery may be limited" in "the event of fraud" or "if its gold is stolen."

The prospectus is clearly telling investors that the gold is not insured. The prospectus is clearly telling investors that in the event of fraud, they will lose. The prospectus is clearly telling investors that if the gold is stolen is some manner, they will lose. Those are monumental risks that should be minimized by any prudent trustee, but clearly aren't in this highly questionable ETF.

In light of these extreme risks, do you really think it is prudent to place your hard-earned wealth into such a suspicious ETF that virtually promises you that the gold isn't there ?

You'd be just as well off entrusting your wife or daughter to a gang of rapists, and the results would likely be similar.