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gold trust gld etf audit empty vault

Warning! SPDR Gold Trust GLD ETF May Have Audit Issues

by Trace Mayer, J.D. on February 19, 2009 · 17 comments

Reading time: 5 – 8 minutes

In December I published Beware! The SPDR Gold ETF GLD And SLV ETF Prospectuses Are Problematic where I briefly perused the SPDR gold trust GLD prospectus.  It concluded, “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.”


From the original article, “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.” 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).”


A perceptive reader commented (#25):

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. [emphasis added]


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.”

The audit test was performed to the standard of ‘reasonable assurance’.  Piecing these assertions together it could be possible for subcustodians to provide incorrect information, either negligently or willfully, to the Custodian concerning the physical gold quantity or quality. If the incorrect information came to the knowledge of the Custodian then they would issue Baskets.  Regardless the Trust is unable to visit the premises and examine the Trust’s gold or any records maintained by the subcustodians.  As a result, the paper instrument would inaccurately represent the represented underlying physical bullion and the error would most likely not be discoverable.


In the 10-K on page F-3 SPDR Gold Trust asserts an “Investment in Gold, at cost” of $16,878,554,000.  The term ‘investment in gold’ is used in multiple places throughout the 10-K.  This is contrasted with other terms such as ‘Proceeds from sales of gold’.  This raises the issue of whether gold and investment in gold are synonymous terms?

In accordance with International Accounting Standard 1, The Bank for International Settlement’s Annual Report, under Accounting policies footnote 14, treats Gold as a financial instrument.  Under Notes to the financial statements part 5 the Bank is extremely careful to distinguish ‘total gold holdings’ as being comprised of ‘gold investment assets’ and ‘gold and gold deposit banking assets’.

In GLD’s case, the financial statements make a significant distinction between ‘investment in gold’ and ‘gold’.  This is odd considering most companies do not make such a distinction between similar financial instruments such as ‘dollars’ and ‘investment in dollars’ or ‘euros’ and ‘investments in euros’.

Also odd is the lack of transparency over what GLD’s ‘investment in gold’ is comprised of.  Is the phrase ‘investment in gold’ broader, narrower or completely different from the term ‘gold’?  For example, can a COMEX futures contract, warehouse receipt or other similar OTC derivative fall under ‘investment in gold’?  The term gold is well defined as a chemical element with the symbol Au and atomic number 79.  Obviously, a warehouse receipt for gold is not gold unless the receipt is made of the chemical element of atomic number 79.

Mr. Turk addressed this particular issue and concluded, “If GLD declared its asset to be “Gold”, the fund’s auditor would have to substantiate that the gold really exists, which GLD of course cannot do because of the inability to audit or even inspect gold stored in subcustodians and sub-subcustodians, which is a risk noted in the prospectus.”

Because the Trust does have some gold in their vault the auditors are most likely satisfied to a ‘reasonable assurance’ concerning the rest of the gold.


GLD ETF Trust supposedly holds more than 1,000 tons of gold.  That amount is surpassed only by the United States, Germany, IMF, France, Italy and Switzerland; assuming they have the gold they claim.  Under the GLD prospectus and latest 10-K it appears that the Trust neither needs to own actual physical gold that constitutes atomic number 79 nor allow their auditors to see and touch the undefined ‘investment in gold’. I agree with the reader who asserted that ‘it’s hard to imagine they [auditors] didn’t at least send someone to the premises of the Custodian to have a quick peep’.  In other words, ‘Just trust us, the gold is there.’ But why believe them?


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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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{ 4 comments… read them below or add one }

1 Dan Griffiths February 19, 2009 at 8:55 am

Interesting analysis. I would think that the auditors might be able to get their “reasonable assurance” that an “investment in gold” exists by merely obtaining written confirmation of the invesment from the custodians or sub-custodians. This is the way that other “investments” are audited. For example, when auditing investments in equity or debt securities, auditors do not go to Smith Barney or Merril Lynch and inspect stock certificates or bond debentures. They send a letter to the brokerage house requesting confirmation of the securities that their client claims to own. In this case, because we are talkiing about an “investment in gold,” I imagine that the procedure would be about the same. From the auditors’ perspective, the written confirmation from the custodian pushes most of the liability onto the custodian in the event that the “investment in gold” does not exist.

2 Mark Herpel February 19, 2009 at 2:18 pm

The Legal Structure of GLD. Who are these guys?
A. There is a Sponsor of the ETF – the World Gold Trust Services, a subsidiary of the World Gold Council in London.
B. There is a Trustee subsidiary that holds title to the bullion and issues shares – The Bank of New York (BK).
C. There is one listed Custodian – HSBC (HBC), and provision for one or dozens of “sub” custodians, Great, if something goes wrong, first you’ve got to find where which custodian allegedly had it. And while the custodian is charged with a duty of due care in hiring the subs, there’s no assurance the subs won’t screw up afterwards and there’s no real recourse if a sub does. Which brings up…
D. There is a marketing agent, for the shares – State Street Global Agents, a separate creation of State Street Bank (STT) in Boston, but they really don’t answer anybody’s questions. GLD is considered a “permanent offering” and the aforementioned marketing team can say nothing about anything during a permanent “quiet period.” This ETF took two years to get through the SEC…And I’m not sure it didn’t get the benefit of grade inflation on the SEC view of crookedness as it went along. “Hey,” the SEC said, “This ETF isn’t absolutely, totally rotten on its face, let it go through. At least it’s not a CDO. Hah, hah.”
Each of these outfits have created separate subsidiary corporations to provide more limitation of liability for the parent. There were marvelous waffle words, and exemptions from legal liability for even these subsidiary players in the original S1 prospectus, filed on November 15, 2004. These have been carried forward and even improved upon.

3 John Wilson November 21, 2009 at 2:49 pm

Dear sir,
As a Canadian reader, I can understand the obvious shortcomings of certain US Gold ETF”s
In Canada ,most Gold ETF’s and Gold mutual funds, are regularly audited, the quality of the bullion checked, and is usually stored , with highly limited access, by one of Canada’s chartered banks. For example The Bank of Nova Scotia has been in the gold and silver business for over 100 years.
I agree that the question of trust and security is paramount for gold owners , everywhere.

John Wilson.

4 Alasdair Macleod April 23, 2010 at 10:24 am

It is a bit rich that GLD (and therefore its auditors) cannot visit its own property. PHAU:LN has full access, and has two audits per year, with the audit pubished on its website.

More importantly, I see no limitation in the prospectus to GLD leasing its gold. Because ownership does not change, leased gold shows as GLD’s property, even though it is not there.

Tie these together and you may have your answer. Unless GLD categorically denies it is leasing and changes audit arrangements, I would not touch it with a bargepole.

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