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Beware! The SPDR Gold ETF GLD And SLV ETF Prospectuses Are Problematic

by Trace Mayer, J.D. on December 13, 2008 · 95 comments

Reading time: 8 – 12 minutes

[NOTE:  A follow-up article on the SPDR gold ETF – Warning! SPDR Gold Trust GLD ETF May Have Audit Issues]

The ‘sweat of the sun’ and ‘tears of the moon’ are singularly unique commodities.  They function as unencumbered equity and function as a presentation currency.  For this singular reason they are largely hoarded not consumed and serve to protect against despotic government inroads by preventing confiscation through inflation which is a form of taxation without representation.

The SPDR gold ETF GLD and the SLV are commonly represented as being bullion.  Accepting this assertion is naive and with potential financially lethal consequences.  While GLD and SLV track the relative prices that is where the similarities with bullion end.

On May 20, 1999 Alan Greenspan testified before Congress, “And gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”

The SPDR gold ETF GLD and the SLV are not this ultimate form of currency.  I will raise only a few essential issues although there are many.

QUALITY OF GOLD IN SPDR GOLD ETF

Gold is a physical substance with a specific definition and is listed as element 79 in the periodic table.  Gold is not subject to any risks and serves with complete fidelity only its master.  Drafted by securities attorneys usually earning $500+/hour the GLD prospectus, which is similar to SLV’s prospectus, states, “Investing in the Shares involves significant risks.  See “Risk Factors” starting on page 6.”  Page 11 states “Neither the Trustee nor the Custodian independently confirms the fineness of the gold allocated to the Trust in connection wtih the creation of a Basket [issuances].”  Page 12 “In issuing Baskets, the Trustee relies on certain information received from the Custodian which is subject to confirmation after the Trustee has relied on the information.  If such information turns out to be incorrect, Baskets may be issued in exchange for an amount of gold which is more or less than the amount of gold which is required to be deposited with the Trust.”  There is no assurance that the ‘gold’ held in the ETFs is actually the same gold as defined under the periodic table.

On page 11 “In addition, the ability of the Trustee to monitor the performance of the Custodian may be limited because under the Custody Agreement the Trustee has only limited rights to visit the premises of the Custodian for the purpose of examining the Trust’s gold”.  Therefore, it appears that an audit of the actual physical gold is precluded (Update:  See comments 25 & 26).  In other words, ‘Just trust us, the gold is there.’

COUNTER-PARTY RISK WITH SPDR GOLD ETF

The reassertion of counter-party risk is driving much of the risk in the current markets.  Page 10 states “If the Trust’s gold is lost, damaged, stolen or destroyed under circumstances rendering a party liable to the Trust, the responsible party may not have the financial resources sufficient to satisfy the Trust’s claim.”  On page 9 “The Trust does not insure its gold.”  Further on page 12 “Gold held in the Trust’s unallocated gold account and any Authorized Participanet’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 by the Trust or any Authorized Participant.  In addition, in the event of the Custodian’s insolvency, there may be a delay and costs incurred in identifying the bullion held in the Trust’s allocated gold account.”  Gold is not subject to counter-party risk or in other words the financial ability of a counter-party to pay.  Clearly, GLD is impregnated with counter-party risk that may instantly and violently appear from within like the Alien.

CONFLICT OF INTEREST

There is economic incentive for the Custodians to loot the SPDR gold ETF.  From page 9 “Under the Custody Agreements, the Custodian is only liable for losses that are the direct result of its own negligence, fraud or willful default in the performance of its duties.  Any such liability is further limited, in the case of the Allocated Bullion Account Agreement, to the market value of the gold held in the Trust’s allocated gold account with the Custodian, or the Trust Allocated Account, at the time such negligence, fraud or willful default is discovered by the Custodian”.  Not only does the Custodian attempt to disrobe itself of liability but even if it is found liable it tries to assert damages accounted at the time of discovery of the default.  The probability of such damages being woefully understated relative to the potential future market value in the event of such a default is extremely high.  In effect, this provision gives the Custodian a perpetual call option on the GLD hoard.

Who are these parties that say, ‘Just trust us, the gold is there.’? Page 36 lists some Authorized Participants including such venerable, safe and secure Wall Street behemoths as Bear, Stearns & Co. Inc., Lehman Brothers Inc., Citigroup Global Markets Inc., Merrill Lynch, Goldman Sachs, J.P. Morgan Securities, UBS Securities and Morgan Stanley & Co. Given the past actions of these firms I am not sure I would want them anywhere near my gold.

For example, in June 2007 Morgan Stanley & Co. settled a class action lawsuit for $4.4 million where the complaint alleged ‘that Morgan Stanley told clients it was selling them precious metals that they would own in full and that the company would store.  But Morgan Stanley either made no investment specifically on behalf of those clients, or it made entirely different investments of lesser value and security.’  While the efficacy of the claim may still be at issue the Better Business Bureau-like complaint from unsatisfied customers who initiated litigation does not inspire confidence for those seeking to reduce risk.

During a credit contraction and liquidity crisis the ‘relationship goes out the window’.  On December 12, 2008 UBS ‘UBS AG announced today it has frozen one of its real estate funds until the end of next year, due to an inability to keep up with redemption requests from wealth management clients.’  Why?  The spokeswoman said, ‘We closed the fund temporarily for the protection of the investor’.  It would be most unfortunate to have one’s gold in the sticky fingers of such fine and upstanding firms that refuse to deliver to protect you.

Additionally, the SPDR gold ETF, GLD, and the SLV hoards may pose a convenient source of bullion for the United States government to steal.  Given prior tyrannical history with FDR’s Executive Order 6102 this may be a material threat.  On the other hand, Section 19 of the 1792 Coinage Act stated that those who ‘debased or made worse as to the proportion of fine gold or fine silver therein contained … shall suffer death’.  Perhaps the Americans were more civilized than their French counterparts and preferred the appearance of due process of law when executing their bankers and politicians for destroying their economies with fiat currency and fractional reserve banking.

ACCOMPLICES TO CENTRAL BANK GOLD PRICE SUPPRESSION SCHEME

During the 1990’s Mr. Rubin had devised the gold leasing scheme with the intent being elucidated by Dr. Greenspan’s testimony in 1998, “Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”  Many of the previously mentioned firms are alleged by GATA to be complicit players in the central bank gold price suppression scheme.  Mr. Robert Landis, a graduate of Princeton University, Harvard Law School and member of the New York Bar, has asserted that “Any rational person who continues to dispute the existence of the rig after exposure to the evidence is either in denial or is complicit.”  Is it possible that GLD and SLV hoards are being surreptitiously used to continue the gold price suppression scheme?

CONCLUSION

For those desiring to trade paper gold the SPDR gold ETF, GLD, and the SLV vehicles may satisfy those requirements.  But for those who desire the ‘sweat of the sun’ or ‘tears of the moon’ in order to own the ultimate form of payment and therefore hearken to Chicken Little’s warnings and protect their assets then the GLD and SLV vehicles appear extremely deficient.  Alternative forms of holding allocated gold bullion exist that are affordable, secure, convenient, trustworthy and not subject to counter-party risk.  For these reasons including (1) the quality of the gold is at issue, (2) no audit of the physical metal is permitted, (3) counter-party risk impregnates the investment vehicle and (4) there are strong conflicts of interest with complicit players in the central bank gold price suppression scheme; the SPDR gold ETF, GLD, and the SLV appear impotent in reducing inflation or counter-party risk.  These are not risks to take during The Great Credit Contraction.

SATURDAY NIGHT LIVE’S PROSPECTUS THOUGHTS

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95 comments

ABOUT THE AUTHOR: Trace Mayer, J.D., author of The Great Credit Contraction holds a degree in Accounting, a law degree and studies the Austrian school of economics. He works as an entrepreneur, investor, journalist and monetary scientist. Follow him on Twitter. This is merely one article of 242 by .
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{ 12 comments… read them below or add one }

1 Rob Brown November 15, 2009 at 11:26 pm

The bit that everyone seems to miss is that according to the offering document there is no way you can get your gold out of this fund unless it goes bust, which historically has always been at a significant haircut. Until then the only parties with access to the gold are the Authorised Participants which purchase baskets because only they can redeem baskets for gold, which is the bullion banks.

Even so every physical gold investor is still at the risk of being taxed to oblivion when the price rises. If you don’t take care of that issue before you invest then what is the point? As an individual you are simply a trustee for the tax office who will take when they need through taxation and give it straight to the banks in the form of a bailout, regardless of your nationality.

And then there’s the question of how do you make a physical gold bullion investment liquid without selling it? I’m sure you wouldn’t be pleased at selling it to raise cash at $5K if it then went up to $20K, or higher. Then you’d be miffed, and dare I say, skint.

Sometimes you need to take a big step back and take a wider view. There are better ways…

2 Amschel Ivry November 26, 2009 at 3:36 pm

I was happy to find some etfs I could park my money at while writing options against (classic plain covered call premium collection) based on my now so called “silver certificates” and now I am dissappointed.

3 Dennis Johnson December 11, 2009 at 10:03 am

There is an easy way to monitor the “performance” of the GLD and SLV ETFs: Chart GLD:$GOLD and SLV:$SILVER on a daily basis. If the chart starts falling in a more rapid fashion, there is monkey business going on. There are some big money players involved in these ETFs, and if they start smelling a rat, the above charts will start to fall. Get the hell out, or better, short the ETF and buy the physical for a no-risk trade.

4 Brian Scrocca February 24, 2010 at 3:55 am

I have owned CEF and the sister fund GTU which is more weighted in gold than silver. You can call them and ask any question you like. I spoke directly to the son who told me his father started the fund some 35 years ago. So they do have a great reputation and store the metals in one of the safest banks Canadian chartered banks in the world.

5 Yikes! August 20, 2010 at 9:44 am

Can anyone comment on the tax ramifications of owning SLV and GLD? I have heard that the IRS treats them the same as owning the metals themselves and the gains are treated as “collectables” and taxed at 28%. I have also heard that these rules do not apply to GTU and CEF. Anyone?

6 Trace Mayer, J.D. August 20, 2010 at 10:27 am

Hi Yikes!, there is actually a tax opinion from a leading law firm contained in the prospectus. So I would recommend reading that for the full scoop. But yes, the general thrust of the opinion is to treat this paper gold as physical gold. I am not sure whether the IRS has addressed the issue and do not have time to research it right now.

7 goldbug August 20, 2010 at 10:49 am

Gold ETF’s are treated as collectibles and taxed at 28%. The question to ask is where do they get there GOLD when the numbers don’t jive worldwide . If you read the prospectus of GLD they really don’t have to lay claim to every ounce of GOLD they say they have. CEF and GTU are gold trust of Canada and are traded as a security, a stock subject to long and short term capital gains. They actually own the GOLD and Silver in the safests banks in the world. There charter does not allow them to dilute the stock when adding the metal to the fund. They do not sell it nor loan like ETF’s.

8 Guy Jones August 31, 2011 at 8:26 am

Very intriguing and thought-provoking article to a novice on the subject such as myself. Thanks for illuminating some issues that I had not previously been aware of with respect to the GLD ETF.

9 Anita September 19, 2011 at 8:46 pm

Instead of going into Physical Gold and Silver, people invest in the mining stocks. These can be quite profitable but over the long haul, the numbers paint a different picture. They introduce risk into something that is a sure thing, and on the average will outperform the mining stocks anyway.

10 Ernest December 2, 2011 at 8:52 pm

I’m glad I never got sucked into the ETF stuff. If you don’t hold it in your hand, as far as I’m concerned, it doesn’t exist. Thank you for making this information available.

11 Richard February 6, 2012 at 2:10 pm

There was a topic discussing GLD flaws in Yahoo Finance that was suddenly deleted: http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_S/threadview?bn=72878&tid=394242&mid=396003

A former poster in the topic even complained about the censorship and got banned here: http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_S/threadview?bn=72878&tid=405622&mid=405622

Notice the title “Censorship to cover GLD’s flaws” and the first post is missing. Insurance was one of the big subjects that were being discussed before the uncalled for deletion of the thread. The quote below reveals some issues that GLD is trying to hide.

“Has anyone tried contacting State Street Global Advisors (the manager of GLD) and asking if their underlying physical assets are insured? I contacted them at 866-320-4053 to ask if the physical gold bars are insured but they just side stepped the question and said HSBC bank has “some sort” of insurance on their holdings. They won’t say directly that the GLD physical gold bars are insured but yet they also won’t say they are not insured too.

One other question that SSgA dodged was when I asked them when they plan to readjust the GLD price to reflect the actual amount of physical gold in the HSBC vault. They sell off a portion of the physical gold to pay off expenses so as time goes on, the GLD price becomes less and less accurate in tracking the actual gold price.

With all this lack of transparency, one has to wonder why not just own physical gold yourself? At the very least you would stay away from GLD’s hemorrhaging storage fees.”

It’s not like there are many ways for the average investor to verify the physical gold. With the news of the ETF UBS trader is still fresh in everyone’s minds, I wouldn’t say GLD is immune to fraud. At the end of the day, GLD is just a piece of paper with one less line of credibility – insurance.

12 H C March 24, 2012 at 4:38 pm

So is it too late to get in on this Ponzi scheme?

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