Whether you are planning for a collapse of our economic system, or simply want to diversify your assets in such a way that you don’t lose everything all at once in a massive stock market or real estate crash, gold is an investment you’ve probably considered.

In the past, we have suggested that the ideal way to invest in gold (or silver) is to purchase the physical metal. We’ve also discussed owning stocks of companies that own and operate gold mines as an alternate way to invest. Though it’s not as safe as holding the physical metal for a number of reasons, it’s better than nothing. A new investment vehicle which has popped up over the last several years, that also allows investors to ‘buy’ gold is the exchange traded fund, or ETF.

An ETF trades just like a stock, and some ETF’s like the Market Vectors Gold Miners ETF actually hold ownership of mining companies in the form of stocks. Purchasing an ETF like GDX is essentially like purchasing a basket of gold mining companies (over 30), helping you to diversify your risk across the entire industry as opposed to betting on a single company to perform.

But not all ETF’s are created equal, and some purport to invest directly in specific commodities like oil, silver or gold. Many investment advisers, recognizing investors’ need for safe assets, have offered their clients the opportunity to buy gold via these commodity based ETFs. And in recent months, some of these precious metals ETFs have seen massive inflows of capital. The problem, of course, is that while investors believe these gold commodity ETFs to be the equivalent of purchasing the physical metal, nothing could be further from the truth.

Janet Tavakoli of Tavakoli Structured Finance, Inc. discusses gold commodity ETF’s and how investors may be getting set up for wealth destruction in How to Corner the Gold Market:

Pump up the gold story. Get your friends to tell retail investors to buy some gold every month. Get your buddies in the financial business to offer exchange traded gold funds (ETFs) that claim to buy physical gold. This will sound safe to retail investors, but in fact, the ETFs are very risky. This will serve your purpose when you are ready to start a panic. These particular ETFs will allow the “gold” to be commingled with the custodian’s gold, and the custodian can lease out the gold. Moreover, the “gold” custodian can give it to a sub custodian that the manager doesn’t know. The sub custodian can give it to yet another sub custodian unknown to the original custodian. The manager will never audit the gold, and the gold is not “allocated” to a particular investor. Since this is an “exchange traded” gold fund, investors will probably assume the gold is regulated by the Commodities Futures Trading Commission (CFTC), but it isn’t. By the time investors wake up to the probability that there is very little actual gold backing their investment, your plan will be ready to execute.

Investing in these types of gold assets is fine if you understand that you are buying “paper gold,” and that you are subject to counter party risk in the event that someone can’t deliver the gold and your ETF paper holding could essentially become worthless in a market sell-off.

Of course, your adviser may argue that these assets are regulated and there is nothing to worry about. If this is the case, it’s likely that the same adviser was saying the same thing about mortgage backed securities in 2007. So be sure to cross-check anything your adviser tells you.

Karl Denninger, of Market Ticker, weighs in on the serious possibility of the gold ETF scam:

What happens if Janet’s scenario is correct?

Panic, that’s what. A global market meltdown in which a handful of huge banks (who are very, very short in the futures market) suddenly get assigned for delivery – and yet they don’t have, and cannot acquire, enough physical gold to make delivery, because their open interest (in aggregate) exceeds the free supply available to trade.

This bankrupts these large dealers.  It also bankrupts the ETFs, who suddenly are “discovered” as having “leased” out all their gold – that is, they’re holding worthless paper promises to replenish their depository written by someone who has unfortunately become insolvent.

The “gold bugs” (those who hold physical metal) are of course very happy by this course of events, as the “spot” price would go to the moon – instantly.

Is this what’s going on?

Who knows.

It certainly is the allegation and the number of people running stories that lead you to this conclusion over the last few months has reached a fever pitch.

But before buying into this story on either side be aware that when this was attempted by the Hunt Brothers with silver (and it was nearly the same path that Janet outlines in her article) the CFTC and other “regulators” in the market came in and changed the rules.  The danger here can be extreme, as most people with physical metal (the only people who will benefit if there is a monstrous spike in price – if you’re holding an ETF you will in fact likely get nothing!) cannot dispose of it fast enough to take advantage before the inevitable collapse on the back side of the cornering attempt occurs.

When the Hunt Brothers attempted this silver went from $11/oz to nearly $50 in less than four months – but two months later it had collapsed to below the original $11 price, with much if it happening in a literal single day.

[emphasis added]

For those holding real, physical metal, you could see a massive rise in the price of gold rather quickly. Of course, if you don’t realize profits at the right time, then you could see your precious metals turn around and go the other way just as quickly.

In addition to alerting potential gold investors of the dangers of commodity based ETFs, we want to publish this information for those holding physical assets.

There may come a time when this scenario actually does play out, in which case, you may have just a small window of time to realize some of your profits. Your decision to eventually sell your precious metals will be dependent on a variety of factors including your personal financial position, the state of the global economy, what the US dollar is doing, and overall sentiment of the consumer. But, one of the signs of a “top” in gold, or at least an intermediate “top,” could be an event such as mass defaults in the paper gold markets. Keep an eye out for it, because if it were to occur, it could be a once in a lifetime opportunity to realize massive gains in a short period of time.

Buying gold and silver is fine, but in addition to understanding why you buy and hold precious metals, you should have some ideas as to why you might want to sell and what signs to look for. (Some thoughts on When to Sell from McAlvany Weekly Commentary)

Video of GATA Chairman Discussing CURRENT Paper Gold/Silver Manipulation Schemes

Andrew Maguire, a precious metals trader in London has the inside scoop on exactly how the big banks (i.e. JP Morgan) are manipulating prices and has predicted specific market movements days in advance because of knowledge gathered from the actual manipulators.

This is real, it’s happening right now, and if you’re in paper gold related commodity assets (Not actual gold producing companies or ETFs like GDX or GDXJ) then you stand to lose a substantial portion of your investment.

It is a matter of time before this fake asset bubble detonates and takes millions of unsuspecting investors with it.