Do physical gold ETCs hold enough gold bars?

Or are they? Because of the high privacy surrounding the gold that backs up ETC securities, rumours the bars are being slyly lent out - or that many of them don't even exist - have been bubbling for years. Just last week, following falls in the gold price, an Investors Chronicle reader asked: "How many ETCs that claimed to hold real gold were at risk of mass redemptions because they didn't have enough (or any) of the shiny stuff?"

If such rumours were proved to be true, investors would be left high and dry if anything went wrong. But a good rummage through the websites and literature of physical (trading real metal) gold funds suggest these accusations are specious.

There are four providers offering physical gold ETCs, the cheapest way to invest in the precious metal, on the London Stock Exchange - db-X trackers, ETF Securities (has three funds in the space), iShares and Source. Each publicly offers two forms of proof that their gold isn't just an imaginary asset. The first is a daily updated list of the individual gold bars in the vault, and the second is proof of a twice yearly inspection from independent auditors.

Neil Jamieson, head of UK and Ireland sales at ETF Securities, says: "We can't reveal the location of our vault for security reasons, but we can confirm there is absolutely no lending of allocated metal as far as we are concerned. In fact, we don't even know where the vaults are - only the banks who look after our gold, HSBC and JPMorgan, are allowed to know their location."

Michael John Lytle, chief development officer at Source, also refutes the claims, highlighting the fact that its vaults are audited by its accountants and specialist gold auditor Inspectorate a further two times a year.

In 2010, fund manager Sebastian Lyon of Troy Asset Management decided to put ETF Securities up to the ultimate 'acid test' in an attempt to settle the gossip. He gave them 10 days' notice to deliver $45m-worth of gold bullion to his bank. They delivered it.

All this should serve as a manifesto of reassurance, but stubborn sceptics may still hold a seedling of doubt. But the US is striding ahead and paves the path for others to follow when it comes to gold security, with some ETC providers installing webcams in their vaults so investors can watch their gold live on screen from the comfort of their own homes.

While you can't expect anything like this from UK providers any time soon, physical gold ETCs shine brighter than synthetic funds when it comes to investability, according to analysts. Adam Laird, passive investment manager at Hargreaves Lansdown, says synthetic funds and exchange traded notes (ETNs) that use derivatives to trade gold are at risk of not matching up to its true price. "There’s only one way to go when investing in gold," he says. "And that's physical."

But physical gold funds come with their own risks attached. Peter Sleep, a senior portfolio manager at Seven Investment Management, says investors are exposed to counterparty risk from the banks that issue the securities, as well as the ones acting as their custodians looking after the underlying collateral - the gold. If the custodian was in trouble, getting to the gold would be problematic. Mr Sleep advises checking custodians' credentials (their credit rating must be high grade) before investing. He also says gold is not a good "fallback" asset in a crisis. "Gold is one of the last assets I'd want," he says. "Gilts or treasuries would be much safer."

The risks of investing in gold hit home for thousands of investors when the price slumped earlier this month. Some physical gold funds have seen small net outflows of cash thanks to a "mixed sentiment" surrounding the metal. Fund providers say while short-term investors are running for the hills, long-term players are piling into gold, resulting in a small net loss of capital - but nothing violent enough to fluster them.

Is my physical gold ETC safe?

■ Find your gold bars on the official list published by your provider and if you can't find it, contact them immediately.

■ Check to see if the gold vault in which your gold is stored is independently audited on a regular basis.

■ Check the credit rating of the custodian used by the fund is strong.

Physical gold ETCs listed on the LSE