Risks in owning GLD

1) GLD does not allow redemptions of its gold bullion

GLD failure to allow redemptions in gold is suspicious. In fact, only two gold ETFs worldwide allow redemptions in gold, and both of them are located in Switzerland: Gold ETF from Zurich Kantonalbank (ZKB) and Julius Baer (JBGOUA).

Michael Pennington makes this point effectively in his article
WHY I BELIEVE THE GOLD AND SILVER ETF'S ARE SCAMS:

"The most important aspect investing in gold and silver is to take possession of your physical metal. When these ETF's were created, they made it impossible for any investor to take possession of their gold or silver. This should be a major red flag alone."

2) GLD created and run by untrustworthy institutions

JP Morgan, HSBC, and the rest of Wall Street's big financial institutions have given us:

A) A 50+ trillion credit-default-swap market (which threatens to destroy the world's financial system)
B) Subprime CDOs squared (taking worthless subprime loans, adding leverage, and selling it to investors as AAA-rated security)
C) Auction rate securities (investors were sold billions of these "as-good-as-cash" securities, and then the market for auction rate securities collapsed last year)
D) synthetic CDOs (credit-default-swaps were sold and packaged into investment vehicles called synthetic CDOs)
E) CPDOs (credit-default-swaps were sold, leveraged up 15 to 1, and then packaged into investment vehicles called "constant-proportion debt obligations")
F) CDPPs (credit-default-swaps were sold,
leveraged up 80 to 1, and then packaged into investment vehicles called "credit derivative product companies". Read more)

Aren't you the least bit curious what horrors these same institutions have been doing to gold markets? Will GLD turn out to be as "safe" as all the rest of Wall Street's AAA-rated junk?

Michael Pennington further explains the issue:

"The gold and silver ETFs were created by such financial giants as JP Morgan and Barclay's Bank that also serve as custodians and sub-custodians. These are the very firms that have been involved in the process of short selling gold and silver in huge quantities. That they would be involved in creating the ETFs had to be considered as most unlikely unless they had nefarious purposes."


3) GLD's gold is located in London, where most the world's gold leasing occurs.

If GLD wanted to inspire confidence in its gold holdings, it choose the wrong location to store its gold. London has a historic role as the market of choice for central banks' efforts to suppress gold prices. The fact that much of the world's gold leasing occurs in London only adds to the uncertainty around GLD. From the SPDR Gold Shares Prospectus:

allocateD GolD: The Trust's allocated gold bullion is kept in the form of London Good Delivery bars (400 oz.) and held in an allocated account.
Storage: The gold bullion is held by the Custodian, HSBC Bank USA, in its London vault or in the vaults of sub-custodians.


4) Reading the Prospectus shows how GLD is loaded with counter-party risks.

I recommend GLD investors re-read its perspectus, as the ETFs loose legal framework and counterparty risks are clearly outlined. The SPDR Gold Shares Prospectus states that GLD
"is subject to a number of risks and uncertainties, including, but not limited to:"

  • fluctuations in the price of gold;
  • reductions in the amount of gold represented by each Share due to the payment of Trust expenses and the impact of the termination of the fee reduction under the Trust Indenture;
  • purchasing activity in the gold market associated with the purchase of Baskets from the Trust;
  • the lack of experience of the Sponsor and its management in operating an investment vehicle such as the Trust; unanticipated operational or trading problems;
  • the lack of protections associated with ownership of shares in an investment company registered under the Investment Company Act of 1940 or the protections afforded by the Commodity Exchange Act of 1936;
  • the lack of a market for the Shares;
  • the level of support from the World Gold Council;
  • competition from other methods of investing in gold;
  • the impact of large-scale distress sales of gold in times of crisis;
  • the impact of substantial sales of gold by the official sector; the effect of a widening of interest rate differentials between the cost of money and the cost of gold;
  • the loss, damage, theft or restrictions on access to the Trust's gold; [restrictions?]
  • the lack of adequate sources of recovery if the Trust's gold is lost, damaged, stolen or destroyed, including a lack of insurance;
  • the failure of gold bullion allocated to the Trust to meet the Londo n Good Delivery Standards;
  • the failure of sub-custodians to exercise due care in the safekeeping of the Trust's gold; [ie: leasing out gold (which is allowed per perspectus)]
  • the limited ability of the Trustee and the Custodian to take legal action against sub-custodians; [GLD is designed to protect sub-custodians from the legal action which losses on their gold leasing activity would trigger]
  • the insolvency of the Custodian; [As noted in GLD's prospectus, we know "Gold held in the Trust's unallocated gold account and any Authorized Participant'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.]
  • the Trust's obligation to reimburse the Purchaser and the Market Agent for certain liabilities in the event the Sponsor fails to indemnify them;
  • competing claims over ownership of intellectual property rights related to the Trust;
  • other factors identified in the "Risk Factors" section of the Prospectus filed with the SEC and in other filings made by the Trust from time to time with the SEC.


5) GLD's gold is not audited


As an accountant, I find the lack of audits of GLD's gold bullion inexcusable. How are we supposed to know the gold is actually there?

6) GLD can be sold short

Allowing GLD to be sold short dilutes the gold-backing of each ishares. Also, when GLD is sold short, it undermines the arbitrage process on which all ETFs are based (see how an exchange-traded fund works).

Michael Pennington explains:

The SEC allows shorting selling of these funds which is a fraud itself. So is naked short selling which will be rampant in any commodity-based scam like this. Currently, there are over 10 million shares short in GLD [it's now 14 million] and this does not count the naked shorts since they are not required to declare. That means that there are at least 10 million shares owned by longs which have no physical gold backing them in the vaults of the GLD custodian.

7) GLD is at risk of confiscation

Metals bought from the government-backed financial institutions have an especially high risk of confiscation.

8) GLD is used to sell gold futures

To add insult to injury, GLD ishares are used to sell gold futures and drive down the price of gold. Investor Village explains about this practice:

bullion separately may be deposited and redeemed by "Authorized Participants" for Ishares that never even reached the Retail Market. There is no trust requirement for an Authorized Participant (read specified Bullion Banks and most likely friends) to even sell the ishares (GLD) (received on deposit) into the Ishare market. The Prospectus specifically states that.

Significantly, the depositors ("Authorized Participants") have the alternative of using the Ishares (GLD) as collateral for setting up a spread at the COMEX, by selling Gold futures short against the Ishares they hold.

Such gives the bullion depositor ("Authorized Participant") the ability to make profit at a "Commodity" taxable rate rather than a higher "collectible" tax rate,
which was adjudged to be applicable to GLD. The Prospectus specifically acknowledges that the Authorized Participants may be engaged in bullion trade and have trading desks.

As to the question of whether the gold will be there, the lingering doubt of the potential for "double counting" may exist.

In other words, "Authorized Participants" can deposit gold with GLD's custodian (where it is leased out) and then use GLD ishares to sell gold futures (at an attractive tax rate).

9) GLD has never had storage issues

When the gold holdings of Zuercher Kantonalbank's ZKB Gold ETF reached just 75 tons, the Zurich-based bank was forced to look for more gold storage space because its vaults were full. Straight Stocks report about this lack of gold storage space:

"Zuercher Kantonalbank, the Swiss lender that manages about $107 billion, said its gold vault is full after a surge in demand from investors seeking a haven during the credit crunch.

Assets in the Zurich-based bank's ZKB Gold ETF, backed by about 2.66 million ounces of the metal, have risen to a record for seven consecutive weeks. That amount of gold is worth about $2.25 billion at today's prices and equal to about 12 days of global production.

"Demand is so strong," Susanne Toren, a metals analyst at the bank, said by telephone from Zurich today. "Our vaults are full right up to the top."

Investors are buying gold coins and bars, and exchange- traded funds backed by physical metal, after banks including Lehman Brothers Holdings Inc. collapsed. Assets in SPDR Gold Trust, the largest ETF backed by bullion, advanced to a record 770.64 tons (24.78 million ounces) on Oct. 10.

Zuercher Kantonalbank, which is owned by the Canton of Zurich, also manages funds for silver, platinum, and palladium. Sibylle Umiker, a spokeswoman for the bank in Zurich, confirmed the vault is full and said the company "is looking for more space in Switzerland."

In contrast to the swiss ETF, GLD has accumulated over 1000 Tonnes of gold without ever experiencing storage problems.

10) Whe re does GLD get its bullion?

Similarly to the storage issue, there is little evidence of GLD's supposedly massive gold purchases in the physical gold market. As a result, I share GATA concerns over where the gold ETFs get their bullion:

The failure to unearth the Madoff scandal earlier becomes incredible when one understands that the returns from the market that were claimed on the size of the hedge fund were logically impossible.

The same reasoning screams bloody murder when applied to the many gold EFTs in terms of what it is they really own.

This raises a major question: From where did all the gold claimed to be owned by all the gold ETFs come from?

Where did funds such as GLD get their additional 45 tons in the last month?

We certainly can forget about that gold coming from the Comex. Twelve deliveries would stand out like a sore thumb.

Record keeping eliminates all exchanges around the globe as the source of bullion in any size to all the gold ETFs.

The physical market is so tight that coin minting has all but closed down compared to what it was one year ago. It is hard to accept that the gold EFTs can buy what the mints can't.



Conclusion: The central point to owning gold is safety, and GLD is not safe. The only gold ETFs I recommend are those in Switzerland which are redeemable for physical gold.

This entry was posted in Attractive_Investments, Background_Info, Gold, Market_Skepticism. Bookmark the permalink.

14 Responses to Risks in owning GLD

  1. Anonymous says:

    Have you looked into XETRA Gold (http://www.boerse-frankfurt.de/EN/index.aspx?pageID=44&NewsID;=383)?

    This seems to relieve some serious, although not all of your concerns:

    - physically backed (max. 5% paper gold)
    - physically redeemable
    - stored in vaults in Frankfurt
    - audited yearly (IIRC)
    - gold is not be leased out (according to the German FAQ)
    - physical gold is stored in vaults in Frankfurt

    Of course, some risks still remain, such as loss of the physical asset (insured only up to 150 Million EUR), as well as counterparty risk, the former being an armageddon type concern, the latter being more serious, IMO.

    P.S.: This is NO sales pitch, and NO gold bug trolling.

  2. Anonymous says:

    Michael Pennington makes this point effectively in his article WHY I BELIEVE THE GOLD AND SILVER ETF'S ARE SCAMS:

    Link in point one is not working.

  3. Robert says:

    I think point six that GLD can be short sold on the exchange deserves more emphasis. It's something so obvious that I hadn't really considered before.

    The gold of the 'real' GLD shares being backed is meaningless if other financial players are free to short.

    You can potentially end up with 10x as many people with GLD in their accounts than GLD that exists. What counterparty risk?

  4. Anonymous says:

    What is actually the global impact of the GLD (and also the SLV) shares, in case they going bust?

    1. Another isolated ponzi scheme that doesn't have any meanings to the Gold fundamentals.
    2. Hell-break-loose, physical Gold rises to new heights which will be sustained.
    3. Temporary confusion that settles after some days... the business as usual.

  5. trevor-es says:

    GLD and SLV are instruments for traders, not investors. At least GLD held over a year (I don't know about SLV) is taxed as a 'collectible' at higher rates. Shorting a commodity can have a legitimate purpose. For investors physical or something more reputable like Central Fund of Canada are better.

  6. Robert says:

    Whether or not there might be legitimate reasons for wanting to short GLD it makes a mockery of any pretense that the shares are backed by real gold.

    Sure the initially issued GLD shares may be backed by gold (although it sounds like there are many if's and but's here too) but if financial players without any gold are allowed to also sell GLD shares that are totally unbacked by any gold then what difference does it really make?

  7. Anonymous says:

    A littel cut'n paste from a another article not adressing this issue :

    The combined holdings of the 8 major Gold ETF?s now stands above 47 million ounces and over the past month flows into ETF?s has more than equaled global mining supply. This huge inflow helped drive Gold prices higher during the week.

    If these money had gone into Gold, im certain the price whould have been much higher. But insteed they went to another paper artifact..

  8. Anonymous says:

    On a related note, has anyone seen or heard a bad word about

    http://www.bullionvault.com/

    as i am about to use their service.

    TIA
    Farmer John

  9. Anonymous says:

    I am avoiding gold all together. Gold ETF,s are a scam and owning gold outright is as well. There is no way we are ever going back to the gold standard and there is no way the government will ever allow the public to win by buying gold.

    Trust me, they will punish you.

    If you need a hard asset hedge buy OIL.

  10. Williams says:

    Eric, Excellent research again from your side. I have been trying to understand when the gold price manipulation might end and it seems clear to me now, that the huge money inflow into ETFs will allow the COMEX to keep functioning without defaulting.

    Effectively, when we put money into the suspect ETFs, we are funding the bullion banks to further suppress the metal's price !!! They can lease the gold that should be put into ETF for other long delivery requests they have.

    The only way I see this charade ending is if Central Banks of Russia, China and Saudi start buying physical gold from COMEX. Only they have the strength to moap up all the mining supply from the world, regardless of the ETF shenanigans. Think this is an important point that you may want to highlight in another article. You are being linked to from some aggregator sites and the word would spread.

  11. Anonymous says:

    I currently hold 50k GBP in http://www.bullionvault.com, been a customer since Oct. 2008, so far very good impression.

  12. Bill Jencks says:

    Why just talk about GLD and ETFs?

    I've looked into just purchasing physical gold online.

    I've rejected BullionVault because you have to sell your gold on their own "exchange". This is a suspicious mechanism as well as inconvenient and their whole process seems to be based on "paper gold". Avoid.

    Another one is the Perth Mint in Australia. But I've recently read that because the WA govt. controls this mint, there is a good possibility of gold confiscation in a financial calamity - especially if you are not Australian.

    The best online gold site seems to be http://www.GoldMoney.com which is run by James Turk who is well known for his written opinions on owning gold bullion. Not only can you buy physical gold at this site, but when you sell the gold you are also able to come out in USD, GBP, EURO, CHF, YEN and CAD with no exit charges. This last gives you a tremendous cost free advantage that no other "gold" site seems to offer. I've also sent them 3 emails - in one I asked GoldMoney directly if their gold was based on ETFs or leased gold. They wrote back and said all gold bullion was physically purchased according to order and not based on leased gold or ETFs.

  13. Anonymous says:

    GOLD listed on the ASX allows [code asx:gold or gold.ax] redemption you have to pay $1k, to get delivery and its in 10oz bars at a minimum even though their unit price is in 1/10th oz allocations.
    i guess if u wanted $200k gold a $1k delivery fee might be a good price.

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