Excerpts from the SPDR Prospectus (It's a PDF & opens in a new tab)
Page 6: "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"
"Each outstanding Share represents a fractional, undivided interest in the gold held by the Trust. The Trust does not generate any income and regularly sells gold to pay for its ongoing expenses. Therefore, the amount of gold represented by each Share has gradually declined over time."
Two main points to take from the above excerpt. First is that the physical amount of gold per share of the Gold ETF Funds reduces with time so your purported holding is being eroded away.
Second is that your gold is held on a fractional reserve basis. This means that you don't directly own any gold (the trust does) and that you are a only book-entry creditor of the trust. You always need to strive to have your gold bullion allocated.
Page 8: "Shareholders do not have the rights enjoyed by investors in certain other vehicles. As interests in an investment trust, the Shares have none of the statutory rights normally associated with the ownership of shares of a corporation."
So you have no statutory rights.
This reinforces what was shown in the earlier diagram that stock market shares and the synthetic index funds such as ETF gold trusts are 2 separate entities. You don't even enjoy the same rights and protection as a normal shareholder does.
Page 9: "The Trust does not insure its gold. The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody...Shareholders cannot be assured that the Custodian will maintain adequate insurance or any insurance with respect to the gold held by the Custodian on behalf of the Trust. In addition, the Custodian and the Trustee do not require any direct or indirect subcustodians to be insured or bonded with respect to their custodial activities or in respect of the gold held by them on behalf of the Trust."
None of your bullion is insured - there is no excuse for this. Everyone else that buys and privately stores bullion for you can offer you insurance.
You could therefore be faced with total loss without compensation.
Perhaps this is because SPDR have very strong internal controls and believe that nothing could possibly go wrong...
Page 10: "Gold bars may be held by one or more subcustodians appointed by the Custodian...There are expected to be no written contractual arrangements between subcustodians that hold the Trust’s gold bars and the Trustee or the Custodian...In the event of a legal dispute with respect to or arising from such arrangements, it may be difficult to define such customs and practices...neither the Trustee, nor the Custodian would have a supportable breach of contract claim against a subcustodian for losses relating to the safekeeping of gold. If the Trust’s gold bars are lost or damaged while in the custody of a subcustodian, the Trust may not be able to recover damages from the Custodian or the subcustodian."
The above section is quite a staggering admission by them - they don't have any written contracts in place with anyone that helps to look after the gold for them!
How can any business, especially an ETF gold trust managing USD$30 billion of precious metals, not engage in any contractual agreements with any of its sub-custodians?
You know, I wouldn't expect that from a Mickey Mouse operation run from the back of an old van!
Page 11: "These subcustodians may in turn appoint further subcustodians, but the Custodian is not responsible for the appointment of these further subcustodians. The Custodian does not undertake to monitor the performance by subcustodians of their custody functions or their selection of further subcustodians. The Trustee does not undertake to monitor the performance of any subcustodian. Furthermore, 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"
Above they are effectively saying that there could be a whole chain of sub-custodians looking after the gold and that the trust has no say in who is involved, it has no control over them, doesn't monitor them and can't visit the gold they are storing to audit to see if it really exists.
Page 11: "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"
If the trust goes bankrupt they are allowed to take your gold to pay off their debts. This is why it is essential to always have your gold bullion allocated directly to you.