Reading time: 7 – 12 minutes
[NOTE: A follow-up article - Another Problem With The GLD ETF]
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 ETFs GLD and 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 ETFs GLD and SLV are not this ultimate form of currency. I will raise only a few essential issues although there are many.
QUALITY OF GOLD
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
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 ETFs. 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 GLD and 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 GLD and 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; GLD and SLV appear impotent in reducing inflation or counter-party risk. These are not risks to take during The Great Credit Contraction.
A Problem with GLD and SLV ETFsRELATED POSTS:
- Inflation With Gary North Or Deflation With Mish
- Fair Value Lying
- Physical Gold Is On The Move
- Gold Party Intermission Nearly Over
- The Coming Market Crash
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Among others, the fact that the ETF’s can be shorted. Those short positions need not have gold or silver in the funds to cover them…
Great article although a few key items were left out. In the case of SLV, Barclays changed the words in the original prospectus from “Silver Bullion” to just “Silver” in the latest prospectus…clearly there is little or no “Bullion” in those bars(..or certificates..or neither). Also on December 31, 2007 SLV added 20M oz of silver to their “inventory” only to remove it on January 1, 2008. Either they hired and entire fleet of armored cars for two days or that silver WAS NEVER THERE. Of course it padded the “end of year accounting” pretty well and may have been used to justify JP Morgans monster COMEX short position! And on a final note, a little know firm called EWT, LLC is the “unknown entity” in both SLV and GLD “Authorized Partcipants”. This is where the computer rigging of all markets begins as it was founded by ex NYMEX Chairman Vincent Viola and ex Goldman Sachs henchman David Salomon who reported directly to ROBERT RUBIN! Ah, shades of Bernie Madoff run rampant through our “flexable system”!
Excellent, excellent article. Especially since it agrees with what I have personally been trying to tell people for the past two years. ;-)
But, I think you, perhaps, understated the case ! I agree with all of the facts presented. Those people who thought they were going to actually receive gold or silver some day in the future are, I would say, beyond hope (“clueless” comes to mind). The question is, what is going to happen when the price of gold goes to, say, $2000/oz, and investors attempt to sell their shares, but there ain’t enough gold there – meaning enough of the real thing – for the “custodians” to sell off their stock in order to pay off the sellers ? As long as there are enough buyers to match up with sellers, then the “custodians” can continue their shell game. But at some point – when more people think that gold/silver have peaked, than there are people who think they haven’t – GLD and SLV are going to be forced to redeem shares at less than the correlating physical price of gold/silver. Of course, in that scenario, we would assume that the physical price of gold/silver would also be dropping; but probably not as rapidly as the “correlated” price used by GLD and SLV, if they ain’t got the goods to sell. Not exactly “default” because something will be paid for the shares. But probably a pretty good shellacking on the price of the shares compared to the physical price of gold/silver. In addition, you bring up the excellent point that funds that are holding shares of GLD and SLV and assuring their clients of fortunes coming, can easily just refuse to redeem the client’s money. I predict big scandal coming in the not too distant future. But, maybe the guvm’t will step in and bail out those “too big to fail” ETFs – along with saving face for the prestigious Wall Street firms that set them up. What a circus !
I agree ya’ll. “I will raise only a few essential issues although there are many.” The ETFs are much more like swiss-cheese … but that might be insulting to the swiss adjective. Robert, the government cannot bailout what they do not have.
Thanks to all you folks…I’m slowly coming up to speed on this and cannot understand why the popular media and press is so febrile on these issues of monetary honesty…
You express well founded concerns re GLD and SLV. What is the feeling re CEF? Might that be a more secure alternative?
I own out of the money calls on GLD. I like the idea, any advice on a safer way to express it? I can’t get much leverage having gold in my safe. Would be grateful for any advise.
Um, David, you CAN get leverage with gold in your safe and time on your side. At todays prices, gold is cheap when one considers the consequences of unprecedented expansion of fiat currencies. I’ll keep it in the safe for a rainy day because I have seen clouds approaching. Is that not leverage?
Sounds like to me Gold in your hands will be the last thing standing.
Can you comment on the “safety”of having shares of the Canadian Central Fund (CEF)which holds gold and silver bullion in vaults for shareholders? from a new subscriber.
What about the silver and gold bar serial number lists? Do you think that these are fictional? That trick would be hard to pull off.
Looks like the play is long physical short ETF and wait for the inevitable unraveling.
I sold my holdings in GLD and replaced it with CEF. CEF claims it is insured, segregated and audited.
You cannot however redeem for the physical.
I would also like to know if CEF (central fund of Canada) is a safe alternative.
No one has been able to answer that question for me.
Excellent points on the weakness of ETFs. Here is another point to consider. On P 11. of the Prospectus for GLD (Risk Factors) it says “Custodian has agreed that it will hold all of the Trust’s gold in its own London vault premises except when the gold has been allocated in a vault other than the Custodian’s London vault premises, and in such cases the Custodian has agreed that it will use commercially reasonable efforts promptly to transport the gold to the Custodian’s London vault at the Custodian’s cost and risk. Nevertheless, there will be periods of time when some portion of the Trust’s gold will be held by one or more subcustodians appointed by the Custodian or by a subcustodian of such subcostodian.”
… The plot thickens…
We then are listed the “current” susbcustodians used by the Custodian. Looks pretty reputable up to this point but as you read on you have to start to tremble at the thought of the possible implications…
“The Custodian is required under the Allocated Bullion Account agreement to use reasonable care in appointing its subcustodians but otherwise has no other responsibility in relation to the subcustodians appointed by it. 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 or any records maintained by the subcustodian and no subcustodian will be obligated to cooperate in any review may wish to conduct of the facilities, procedures, records or creditworthiness of such custodian.”
We later read that “The ability of the Trustee and the Custodian to take legal action against subcustodians may be limited… This is becausee there are expected to be no written contractual arrangements between subcustodians who may hold the Trust’s gold and the Trustee or the Custodian.”
On page 10 of the Risk Factors it states, “If the Trust’s gold is 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… It may be difficult or impossible for the Trust to sue a subcustodian in a United States, New York, or other court situated in the United States.”
Just as you though it could not get any better, it states on page 9 of the Risk Factors, “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. The Trust is not a beneficiary of any such insurance… the Custodian may not 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… a loss may be suffered with respect to the Trust’s gold which is not covered by insurance and for which no person is liable in damages.”
What is wrong with this picture? The Custodian doesn’t insure the bullion, and if it did, the Trust would not be a beneficiary of the the insurance. The Custodian can appoint sub-custodian who can appoint a sub-custodian who can appoint a sub-custodian but there is no requirement for any sub-custodian to insure the bullion and no requirement that the multiple levels of sub-custodian enven cooperate with the custodian. I can just see it now. Custodian wants the gold.. sub sub sub custodian says “gee whiz, I was sure it was there the last time I looked but I can’t seem to find it now”.
Me thinks that the gold never left the Central Bank’s vault. It was leased by the Central Bank to a Bullion Bank who exchanged a basket (or a 100 baskets) for shares in the ETF, then sold those shares into the market for cash. Later that Bullion Bank goes bankrupt and there will be a question as to who owns title to the gold (that still remains in the vault ((sub sub sub custodian)) of the Central Bank that leased it in the first place). Is it the Central Bank’s gold under the terms of the lease with the Bullion Bank or the ETF’s? Possession is 9/10 ths of the law. Perhaps that is why there is no insurance requirement on the gold in the first place.
Conclusion.
Presto … no gold in the ETF. No shareholder recourse against the Custodian or sub sub sub custodians. Central Bank has its gold returned. Big Scam!
Oh, there are bar list and the bars are likely real and exist. The issue with them is whether the ETF really owns them free and clear or are they encumbered or otherwise compromised. For example, do they “lease” those bars to someone else, who has then sold them 7 or 8 times? There is no way to know, and with institutional bullion so tight that coin melt bars are showing up on world markets, very good reason to suspect that when push comes to shove there will be multiple claims on that bullion.
I wonder how secure the various “pool” accounts, like at Kitco and precious metal dealer businesses?
Information/Comments?
The government does not want the citizenry to hoard gold as there is no win-win scenario.The velocity of money halts when hoarding occurs; no wages, no taxes, no dividends and no products/services. The gov wants the citizenry to place its wealth in equities/securities/bonds and even real estate so the monies are used to build things, pay workers, pay taxes and pay dividends to the investor; a win-win-win-win scenario if trust and honesty are maintained. Now the dark side of human nature has taken over and the police (SEC, Congress) are derelict and we the people no longer know how to enforce the US Constitution.
Bix, glad to see you are still with us. Loved your last article on your interpretation of Greespan overall plan for gold. Please do write some more. Oh by the way, you are no longer the only sound in the forest. Others have come to the same conclusion. In response to this article, can anyone say MADOFFThis is a PONZI scam to the ultimate.
Perhabs you should also link http://www.GATA.org and/or http://www.lemetropolecafe.com on your linkpage if you like to be taken as a honest place to be for real gold bugs.
This is old news. Anyone with half a brain dumped *paper* ETFs like these when AIG had to be rescued.
The ETFS ETCs for *physically allocated* gold & silver (PHAU and PHAG respectively) are fine, though.
Interesting article. But I’m not sure how you get to “an audit of the actual physical gold is precluded” from “the Trustee has only limited rights to visit the premises of the Custodian for the purpose of examining the Trust’s gold”. “Limited rights” is not “no rights”.
If Deloitte’s statement of 21 November in the 10-K is to be believed, they have “audited the … statements of condition … [and] such financial statements present fairly, in all material respects, the financial position of the Trust”. Now I am quite ready to be sceptical about the lengths DT went to check the gold was there. But, on the face of it, they have effectively stated that the $20bn worth of gold as per the balance sheet really exists and really belongs to GLD. And it’s hard to imagine they didn’t at least send someone to the premises of the Custodian to have a quick peep, though of course in this crazy world of mediocratic financial services it is probably unwise to have 100% faith even in that.
goldbuggy, I am not sure how much more plain it can be other than this from the latest 10-K (Commission File Number 000-32356) on pages 26 and 18 respectively: ” Gold held by the Custodian’s currently selected subcustodians and by subcustodians of subcustodians may be held in vaults located in England or in other locations.” and “In addition, the Trustee has no right to visit the premises of any subcustodian for the purposes of examining the Trust’s gold or any records maintained by the subcustodian, and no subcustodian is obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian.”
Additionally, James Turk makes several good arguments in: http://www.financialsense.com/editorials/turk/2007/0305.html
Trace, thanks for the reply and the link to James Turk. I had not come across the exchange with GLD in Barrons, which is interesting though ultimately inconclusive. GLD assert they have “an independent physical count of the gold, which takes place twice a year”. A lot seems to hinge on the issue of subcustodians. Does “the gold” in their statement include that held by subcustodians? If so, and if true, and if one believes the count is carried out with sufficient diligence, then it would seem they do have 100% gold as claimed. It would be useful to know how much of their gold, on average, is held by “subcustodians”, but I note that they seem in no hurry to clarify things in this respect.
will the 25 of you read all of the disclosures at the end of everything i register for. when i update my mac or when i sign my name on a bill there are about 20 pages of crap that i never read. if i went through all of those disclosures i would find the things you have said here… oh this can happen. and if this happens.. this can happen! i appreciate everything here. but the bottom line is there are 20 billion dollars in the fund and its tracking fine – minus fees. there is gold in the vault believe me. oh yeah! the vault is right next to the sound stage they filmed the lunar landings and elvis actually has food at the pub next door. Hopefully they update the prospectus soon so you all can have something new to read. and if you want to start stock piling gold in your homes make sure you have the dogs and alarm to protect it. no need to reply to my message because i will never come back to this lame site. but oh yeah. gold in 2009 for sure.
What is your feeling on CEF? I have heard that it is a bit safer of a play. I need to buy something in my 401k, and I don’t like much of anything other than gold right now.
I am very interested in learning if CEF is a (much) more secure investment in Gold and Silver than the ETF’s- can’t get an authoritative answer.
Guess what, there is risk in physical ownership too. You could place your order, send your funds and gold might not arrive. It might never get sent, it might be stolen in transit. It might arrive, and then stolen from your home.
It might not be pure, you have to take the vendors word on its quality and purity, and even if you want to ascertain its purity for yourself, this will only be after you take possession. They might send you lead or copper bars.
If you store it in a bank vault, or hire someone to guard it there is the risk they will fail to adequately protect it, or even steal it. Unless you go and check it every day, you’ll just have to trust them when they say ‘It’s here!’
Seriously 3/4s of the risks outlined in the prospective are inescapable. Even if you took direct possession of the gold yourself, you would STILL be subject to most of them.
Physical gold may be safer than an ETF, but its not safe. There are still risks, and many of those risks are the same as the ETF.
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 $20K, or higher. Then you’d be miffed, and dare I say, skint.
Sometimes you need to take a big step back and take a wider view. There are better ways…
I was happy to find some etfs I could park my money at while writing options against (classic plain covered call premium collection) based on my now so called “silver certificates” and now I am dissappointed.
There is an easy way to monitor the “performance” of the GLD and SLV ETFs: Chart GLD:$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.
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.