If you own the SPDR Gold Trust exchange traded fund, take a couple minutes to read this. It’s for you own good.

GLD, as this ETF is known, is the largest gold-based fund in the world these days. And as the trite saying holds: The bigger they are, the harder they fall. Which means that GLD might just have an Achilles Heel you should know about, if you’re relying on this fun to hedge the coming bout of inflation and the currently weakening dollar.

The issue began back in the spring, as the Covid crisis unfolded and investors began diving into gold for financial protection. GLD experienced massive demand, which you can see in this chart from World Gold Council…

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After an initial selloff in March (gold serving one of its primary purposes as a source of immediate liquidity in a crisis), buyers rushed into the metal. So massive was demand, in fact, that GLD’s custodian, global banking giant HSBC, couldn’t source on the open market all the physical gold necessary. Indeed, in SEC filings, GLD noted that gold bars equal to as much as 4.4% of the ETFs holdings were being held at Bank of England, a sub-custodian to HSBC.

This is relevant because it says that in what is, frankly, a relatively minor bull market in gold, GLD has trouble sourcing the metal it needs and must essentially borrow it from the Bank of England. But BoE also serves as a sub-custodian to other ETFs and borrowers of gold, and England’s central bank, of course, ultimately has a finite quantity of gold itself.

In an explosive market for gold, all this borrowing and lending, as well as the custodial and sub-custodial agreements, could create a daisy chain of disaster. An investor expecting GLD to rise amid truly soaring gold prices could, instead, see an unexpected disconnect.

Moreover, surging demand for gold could feed upon itself and drive prices even higher as gold ETFs and others that have borrowed gold scramble to buy the metal at any price necessary to meet their obligations. But, again, ETF owners might not actually experience that rise because of the inherent flaws in the custodial arrangements that define many gold ETFs.

In short, GLD owners might end up realizing that don’t own a claim on physical gold … but, rather, a claim on a piece of paper that is essentially a shattered chain of broken custodial agreements.

To be clear, GLD’s issue in the spring wasn’t a one-off incident. GLD’s 2Q SEC filing in August reported that the ETF was still borrowing gold from the BoE, and that those quantity of holdings there had risen.

Certainly, there’s no assurance that any of this will morph into some kind of meltdown. Then again, there’s no guarantee it won’t – and that uncertainty is the problem gold ETF investors must keep in mind. After all, financial history is rife with derivative agreements that implode to the great detriment of those who own them. If custodians and sub-custodians ultimately cannot meet their requirements during a dramatic and unexpected melt-up, owning certain gold-backed ETFs could very well prove to be quite the negative experience for investors.

In that instance, you’re going to be far better off owning physical gold and, especially, major gold miners such as Barrick (GOLD), Newmont (NEM), Royal Gold (RGLD), or Agnico Eagle Mines (AEM), among others.

At this point, it’s a “better safe than sorry” play.