Are Gold ETFs Backed by Physical Gold? Custody, Risks, and Taxes

Yes, gold ETFs can be backed by physical gold, and the largest U.S. funds — SPDR Gold Shares (GLD), iShares Gold Trust (IAU), and SPDR Gold MiniShares (GLDM) — each hold real bullion in vaults on behalf of shareholders. A separate category of gold ETFs holds no metal at all, using futures contracts to track the price instead. Even among the physically backed funds, “backed by gold” comes with limits worth knowing before you buy.

Two Very Different Kinds of Gold ETFs

Gold ETFs fall into two structures, and the label on the fund matters.

Physically backed funds buy and store actual gold bullion. Each share represents a fractional, undivided beneficial interest in the fund’s gold holdings.¹ When the spot price of gold moves, the fund’s value moves with it because the metal is physically there.

Derivative-based, or synthetic, gold ETFs hold no gold. They use futures contracts, swaps, or other financial instruments to replicate gold’s price. Their performance depends on those contracts, and structural costs can pull the fund away from gold’s actual price over time. In a market condition called contango, longer-dated futures cost more than nearer ones, so each time the fund rolls an expiring contract into a new one, it effectively sells low and buys high. Over years, that drag compounds. Futures-based funds also carry counterparty exposure that a fund holding a tangible bar in a vault does not.

If physical backing matters to you, check the prospectus. The distinction is not always obvious from the ticker or the name.

Where the Gold Actually Sits

The gold behind a physically backed ETF sits in high-security vaults managed by a custodian, typically a major bank. GLD’s custodian is HSBC, and the metal is stored primarily in London, one of the world’s main gold trading hubs.

The bars themselves must meet London Good Delivery standards set by the London Bullion Market Association. Each bar weighs roughly 400 troy ounces and must have a minimum fineness of 995.0 parts per thousand, or 99.5% pure gold.² These specifications keep the bars uniform in quality and internationally tradeable.³

Every bar is tracked individually. The fund publishes a complete bar list showing the serial number, refiner, weight, and vault location of each bar it holds. Not a summary or estimate. A line-by-line accounting of potentially thousands of bars, fully allocated at the end of each business day. Investors can typically download the full list from the fund’s website.

You Cannot Ask for Your Gold

Here is the part that surprises new investors. Only large financial institutions called Authorized Participants can transact directly with the fund and exchange shares for physical metal. This mechanism keeps the ETF’s market price aligned with the value of the underlying gold: when the share price drifts high or low, APs deliver gold for new shares or return shares in exchange for gold, and the arbitrage pulls the price back into line.

If you hold 100 shares of GLD in your brokerage account, you cannot call anyone and request delivery of gold bars. You sell the shares on the stock exchange like any other security. The ability to convert shares into metal exists only at the institutional level. That is what validates the physical backing, but as an individual investor, you never touch the gold.

How the Gold Is Verified

For physically backed gold ETFs, verification is built into the structure. An independent firm inspects the gold at set intervals. For GLD, Inspectorate International Limited conducts two counts per year: a complete bar-by-bar count at the fund’s fiscal year-end in September, and a random sample count at another point during the year.⁴ The results appear in the fund’s regulatory filings, which anyone can read on the SEC’s website.

Beyond the formal audits, the public bar list works as a real-time transparency tool. Each entry identifies the refiner, the bar’s serial number, its gross and fine weight, and the vault location. A motivated investor can cross-reference the list against LBMA-accredited refiners and watch the total bar count change over time.

What “Backed by Gold” Does Not Mean

Physical backing does not eliminate every risk. A few common assumptions about these funds turn out to be wrong.

The Gold Is Not Fully Insured

The belief that the gold is fully insured is false for the largest fund on the market. GLD’s prospectus states plainly: “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.”¹ The trust is not a beneficiary of the custodian’s insurance, has no say in the amount of coverage, and cannot require subcustodians to carry any insurance at all. A catastrophic loss at the vault level could leave shareholders with an uninsured gap.

Subcustodian Risk

The custodian does not necessarily hold every bar itself. It may delegate storage to subcustodians, other banks or vault operators, and the trust’s prospectus does not require those subcustodians to be insured or bonded.¹ The gold is real, but the chain of custody has links that fall outside the direct oversight of the fund’s trustee.

Fund Expenses Slowly Eat the Gold

A physically backed gold ETF charges an annual expense ratio, and it pays that fee by selling small amounts of gold from its holdings. GLD’s sponsor is direct about it: “GLD does not generate any income, and as GLD regularly sells gold to pay for its ongoing expenses, the amount of gold represented by each Share will decline over time to that extent.”⁵ At GLD’s expense ratio of 0.40%, the gold behind each share shrinks measurably over a decade.⁶ Lower-cost alternatives like SPDR Gold MiniShares (GLDM), with an expense ratio of 0.10%, slow that erosion considerably.⁷

A share of a physically backed gold ETF today represents slightly less gold than the same share did a year ago. Over short holding periods the effect is negligible. Over decades it compounds, and the expense ratio becomes one of the most important choices among otherwise similar funds.

How Gold ETF Gains Are Taxed

Owning gold through an ETF does not get you the tax treatment of an ordinary stock ETF. Because these funds hold gold, the IRS classifies gains on shares held longer than one year as collectibles gains rather than standard long-term capital gains.⁸

Standard long-term capital gains on stocks max out at 20% for the highest earners. Collectibles gains face a maximum federal rate of 28%. If your ordinary income tax bracket is below 28%, you pay your ordinary rate instead. The 28% figure is a ceiling, not a flat rate. Investors in the 32%, 35%, or 37% brackets all pay 28% on gold ETF gains rather than their higher ordinary rate. Investors in the 10%, 12%, 22%, or 24% brackets pay their own marginal rate, which is already below 28%.

Short-term gains, on shares held one year or less, are taxed as ordinary income regardless of the fund type.

Tax reporting for grantor trust gold ETFs like GLD is generally straightforward. Because the fund sells only small amounts of gold to cover expenses and makes no distributions, brokers typically handle the reporting on standard brokerage statements rather than issuing a Schedule K-1.⁹ That is a meaningful convenience advantage over commodity funds structured as partnerships, which do issue K-1s.

Comparing the Major Physically Backed Gold ETFs

The largest physically backed gold ETFs all hold London Good Delivery bars and track the spot price of gold. They differ mainly in cost and share size.

SPDR Gold Shares (GLD): The oldest and most liquid gold ETF. Expense ratio of 0.40%. Its high share price and deep trading volume make it a staple for institutional investors, but the expense ratio is among the highest in the category.⁶
SPDR Gold MiniShares (GLDM): A lower-cost alternative from the same sponsor. Expense ratio of 0.10%, one of the cheapest physically backed options available. Each share represents a smaller fraction of an ounce, so the per-share price is lower and more accessible for individual investors.⁷
iShares Gold Trust (IAU): BlackRock’s physically backed fund. Its 0.25% expense ratio sits between GLD and GLDM. Like the others, it stores London Good Delivery bars in vaults and publishes a daily bar list.¹⁰

All three hold real gold, publish bar lists, and undergo independent inspections. For a long-term holder, the gap between a 0.40% expense ratio and a 0.10% expense ratio compounds into a real difference in how much gold each share represents after a decade. The cheapest option that meets your liquidity needs keeps more of the gold exposure you are paying for.

1
State Street Global Advisors. SPDR Gold Trust Prospectus
2
LBMA. LBMA Good Delivery Rules – Technical Specifications
3
London Bullion Market Association. Good Delivery List Rules
4
Securities and Exchange Commission. SPDR Gold Trust Quarterly Report (Form 10-Q)
5
State Street Global Advisors. SPDR Gold Shares (GLD)
6
SPDR Gold Shares. SPDR Gold Shares (Ticker: GLD)
7
State Street Global Advisors. SPDR Gold MiniShares Trust (GLDM)
8
Office of the Law Revision Counsel. 26 U.S. Code 1 – Tax Imposed
9
State Street Global Advisors. SPDR Gold Trust GLD Tax FAQ
10
iShares. iShares Gold Trust (IAU)