GLD, the “gold-ETF” I’ve posted on previously, is now trading on the NYSE. But James Turk raises some questions, such as, what are you really buying when you buy GLD? “People who might have otherwise bought physical gold coins or bars, but wanted the same thing with more convenience, could be misled into thinking that they are buying physical gold by investing in the shares of GLD. But given GLD’s loose custodial controls, there is no certainty that the investor is actually buying gold bullion in the form of an exchange-traded security”
Source link: http://blog.mises.org/2772/where-is-glds-gold/
Where is GLD’s Gold?
Previous post: Real Leaders: Top 24 Computer-Industry Executives in 2004
Next post: Why Business Cycle Theory Matters
{ 15 comments }
I thought the launching of the gold ETF would be great, now I am not so sure. James Turk is doing a good job exposing this, and he is putting his own neck on the line. GLD filed a lawsuit against him.
This should be understood as an inditement against GLD in particular, not against gold ETFs in general. It is possible that many gold ETFs may be unsound, just like many stocks may be unsound. Owning a company that holds — directly or indirectly — gold is not the same thing as having physical possession of gold. Neither is owning shares in E-Bullion, however, though it’s closer.
I don’t agree with Turk’s apparent opinion that the SEC shouldn’t have allowed GLD to enter the market. The problem isn’t with the SEC allowing this company or that company to do X, but with the fact that the SEC chooses to initiate aggression less severely when it benefits it to do so.
“It is possible that many gold ETFs may be unsound, just like many stocks may be unsound.”
In that case, they do not fulfill the very criteria that they are supposed to fulfill as an investment. Gold (at least in the form of bullion) is supposed to be extremely conservative/stable, not unsound like stocks.
Dear Steven,
If you’re referring to those specific gold ETFs that are unsound (e.g., have a claim to someone else’s claim to gold in an unaudited vault), then you would be right. They are not conservative/stable investments.
Indeed, they don’t offer any advantages over any other investments and should not be bought (there’s no advantage to having a claim to someone else’s claim to gold, as opposed to just having the gold itself, or having legal entitlement to specific gold in a vault). It is obvious that any investment with greater risk, but not with greater possible reward, should not be bought.
However, in regards to ETFs in general, that is not a true statement. The purpose of an ETF is to more conveniently and cheaply “own” gold. It also has a function of allowing people to invest in gold within one’s Roth IRA. While it is possible to invest in gold/silver/platinum and those collectible in a Roth, some financial institutions, like Fidelity, do not allow one to do such in their custodial accounts; thus, ETFs have their use there. One has to do one’s research.
Overviewing some different schemes for ETFs that I’ve come accross…
From the article: “The SEC has broken with precedent. Like the bucket-shops of the 1920′s that allowed investors to bet on price changes without owning the underlying security, GLD enables investors to bet on the price of gold, without GLD being required to meet the same custodial standards required of other retail-oriented mutual funds. Why? Did central banks force the SEC to register the WGC’s fund? Did the SEC cave-in under central bank pressure, even though GLD’s loose custodial controls conflict with longstanding SEC requirements and establish a dangerous precedent? Why did the SEC register GLD in a week when anti-gold jawboning by central banks wasn’t working, making clear they need new tools to keep a lid on the gold price? And why doesn’t the prospectus disclose the big risk that there are serious restrictions on auditing the gold supposedly owned by the fund?”
The answer is because the ETF becomes EXACTLY like a fiat currency. It spawns an artificial pretend fractional reserve “inflation” of the gold supply which would naturally put some downward pressure on its price versus government fiat currencies. Wouldn’t the Fed love to have a similar plan of last resort of “dropping money from helicopters” if the U.S. dollar were to completely collapse (and of course other major government currencies would go down with it) — freshly minted glistening goldbacks to restore the public trust. The ETF is as sound as governments are sound except that the buyers of the ETF assume 0% *credit* risk that the fund can deliver the underlying asset, which is a 100% credit risk on the market makers who sell the etf long or buy it short from the customers.
Also, the ETF authors would not be able to collect royalties from an actual gold fund whereas they probably would make a pretty penny from royalties on a gold *tracking* fund.
It’s interesting that etfs in general have fared very poorly as “innovative” exchange products. There’s many disappointed local floor brokers out there. Customers have stayed away in droves from many of them.
GLD has a future LTCM (Long Term Capital Management) debacle written all over it (though the prospectus terms clearly indemnify them from all liability) precisely because its value is completely dependent upon the rationally expected value to the spot price of bullion holding steady (and in a real code red emergency crisis they would [possibly] exactly inversely correlate, i.e. the etf price would approach zero [if there were no outstanding shorts -- and even if there were outstanding shorts a piece of paper tracking gold is a piece of paper tracking gold, better to sell it and buy some real gold] while the spot price of gold bullion would go through the roof as the etf price severely lagged [even better for the government short sellers]).
Since you have a relatively few HUGE monopoly central banks holding most of the world’s gold (and any private individuals acting the way they do would get 99+ year jail terms), it potentially puts the Hunt brothers attempted corner of the silver market to shame. There are some other non code red emergency scenarios whereby the etf price could differ from the spot price significantly. Wouldn’t the Fed just love to branch out into selling short gold to hold currencies values up the way they manipulate bond markets. For what happens when the masses realize that a declining dollar does not mean a rising euro and all that other export import mumbo jumbo by looking at the prices of currencies in terms of gold? That’s a possible major negative psychological shock that could seriously undermine confidence in fiat currency.
The lawsuit against Turk, if it were to be brought, would probbly be in the range of a 100 million dollars, and thrown out.
David, where can I see that the Perth Mint Certificate Programme is a fractional system? Thanks, Jonathan.
David: good points, and good info on those ETFs. In regards to the ETF managers secretely operating on fractional reserve, I believe that Rothbard also said that they would eventually go out of business due to forces in the free market.
However, I personally do not see the point of having a gold ETF. Frankly, I think that gold as an investment sucks. There are many other things you can put your money into that have higher rates of return. If you want to have insurance in case of economic meltdown, it is best to have your gold in bullion form in your personal possession. Other than that, gold is best as a medium of exchange.
As a note, I believe that all of this manipulation by the central banks of gold and silver is ultimately going to benefit gold and silver investors. I’m not condoning it, just saying that it’s ultimately going to backfire on them. This intervention can keep the prices artificially low, allowing wise investors to accumulate it at bargain-value prices. Ultimately, it cannot last.
Jonathan,
Quoting from
David:
Why would people sell their gold in an economic meltdown? I thought the idea was that at that point it would become money, and fiat would become garbage.
Steven,
That’s true. When gold does become the world-wide money again, you won’t “sell” it: you’ll just use it to buy whatever you want (technically, this is selling it, but for an apple, or a house, or a car, not for fiat-money). However, before that happens, there will be a period during which things will still be priced in fiat-moneys.
I have some doubts on the fractional reserve claims here. Can anyone point to the language in the prospectus that allows the issuance of more shares than gold in trust? I didn’t see it. Or is the claim just that the sponsor/trustee will issue more shares than gold it has?
If that’s the case, let’s see you put your money where your claim is. You are entitled to exchange a basket (100,000 shares) for 10,000 ounces of gold. They claim (falsely, so say some) to own 230,000 ounces. If they don’t have the gold, you’ll break them (or they’ll buy you off at a pretty penny), as happens with all fractional reserve systems that are not protected by the monopoly of a central bank. That will resolve a lot of quibbling and speculation.
David:
Yep. BTW, I would like to make you aware of my new article that has just been posted that is somewhat related to this topic.
http://anti-state.com/article.php?article_id=433
Answering my own question, I briefly examined the prospectus (very interesting reading). The trust covers expenses by sale of its gold and is a declining balance trust. The number of ounces of gold in account decreases over time; a share equals a declining amount of gold over time. Value is preserved only if the market price of gold increases over time at a rate greater than expenses. (See page 32 of the prospectus.)
It’s not a perfect alternative to physical ownership, but provides a means short of the futures market of exploiting an expected rise in price.
Such instruments do not necessarily hold physical gold. For example, gold ETNs generally track the price of gold using derivatives. All exchange-traded instruments, including those that hold physical gold for the benefit of the investor, carry risks beyond those inherent in the precious metal itself.
Gold ETFs : You are buying a quoted, gold denominated, debt security which is the obligation of a trust created for the specific purpose of enabling gold investment through it. The trust deed requires the gold denominated debt of the trust to be backed by gold assets which the trust must own – although possibly in various forms. Most of the gold owned by the trust will be in the form of allocated, vaulted Good Delivery Bars. Some gold assets may temporarily be in forms other than Good Delivery Bars, but where in other forms are likely to be converted into physical allocated good delivery bars in due course.
In both cases the bars retain their Good Delivery status, and thus their marketability in professional bullion markets. In both cases you have the right to withdraw – for a fee – but in both cases the services should be used where you do not expect to withdraw gold except in emergency. This is because it is highly likely that when you withdraw bullion it will lose a substantial proportion of its value with the loss of its Good Delivery status.
More people are choosing Roth IRA conversion rates this year as they conserve for retirement. Deficit reduction rhetoric is one catalyst.
What exactly are you buying when you by GLD stock ?
Comments on this entry are closed.