Investegate reports that US investors are using an unconventional method to get their hands on physical gold.
(emphasis mine) [my comment]
Where can private investors buy the cheapest gold?
By Rob Mackinlay
US private investors are using an unconventional method to get their hands on physical gold and silver in increasing numbers. It is a complex, lengthy process, but significantly cheaper gold and silver is available at the end of it.
[This article confirms my suspicions that COMEX warehouses are being emptied of their gold at an accelerating pace.]
In the UK, data from Financial Express suggests that retail investors are equally obsessed by precious metals but appear less adventurous when it comes to seeking out the cheapest buying methods, something that may require thought now that gold again has hit $1,000 an ounce.
For serious gold and silver investors the idea of buying futures contracts instead of physical gold would be sacrilege. With allegations of price manipulation and shortages of physical metal few are prepared to put their faith in any products backed by pieces of paper.
However the futures market is where more and more US investors are turning to when they want to buy physical metal at the lowest prices. While UK investors don't have the same access (the metal warehouses are all in the US) they appear to have a similar opportunity via physical exchange traded funds (ETFs) and exchange traded commodities (ETC), some of which can be exchanged for physical metal for one-off fees of Ł500.
Unlike futures-backed investment products which never actually take delivery of gold and silver, but continuously renew their investments in the paper markets, sophisticated investors wanting to get their hands on the real thing, buy the contract in the deliverable month and wait for it to expire.
JB Slear, a gold and silver broker based in Arizona specialises in helping high net worth clients take delivery of gold and silver futures contracts. He said that overseas buyers could face particular problems: "We're finding more restrictions being applied to overseas buyers, seems one of the four warehouses will not allow overseas deliveries. We have just been told this by one of the Comex warehouses today. I don't know if this is a lack of communication or not so, for the sake of all, we need to consider this a rumour till we have more people claiming the same problem."
Slear tells his clients that they may have to wait more than two weeks to take delivery as delays and complications in the process have become increasingly commonplace more so now than during the Christmas season ["delays and complications" with COMEX delivery are becoming "increasingly commonplace"?]. In some cases this has fuelled concern that stockpiles are running out [they are running out]. Slear is not convinced by this explanation and blames skeleton warehouse staffing for most of the delays.
But he said that the level of interest in this method of buying gold and silver had increased significantly between November and December.
The reason for the interest is obvious. Slear said: "I know of no other place in this country that offers a price equal to the Comex exchange, nothing comes close. Even with my Premium Delivery Service added, it's far more reasonable to buy from Comex."
Like others involved in the gold market, Slear believes that there are real shortages of precious metals that have yet to be exposed. But he recognises the futures market as a last resort for people who can't buy metals at reasonable prices elsewhere: "If a buyer wants to buy a physical product and cannot find it locally, he or she can go to my firm's web address to transact that business. My business model is a last resort purchase arena for those who need to protect their personal wealth."
He says there is anecdotal evidence that this activity is widespread enough to be affecting warehouse stocks as high net worth clients remove metal from warehouses.
But, he says that the activity has yet to show up on Comex warehouse stock data: "I find it interesting that the Comex numbers don't show any movement at all as far as deliveries are concerned. I have spoken to three of the warehouses and each facility confirms the fact that the metals are being moved out, and in size. One of my clients says that when she went to "will call" her purchase, that the "will call" staging area for deliveries was stacked high and busy. Seems curious that the warehouse numbers reported through Comex, are not showing any reductions. In the Comex defence though, I don't know how long it takes them to account for the movements. I just keep my head down and focus on the job allotted me. That is to get the gold into my clients' hands as fast as possible. It seems the worst case scenario, a G7 currency crisis, is not going away, so I can't blame anyone for being scared."
[I added this chart to make the article clearer.]
Registered gold did decrease 22% (18 tons) in the last six months. Registered gold is owned by short sellers and represents gold available for delivery on futures contracts.
HOWEVER, over the same period, total gold in COMEX warehouses decreased ONLY 3% (7 tons). If COMEX warehouses have been actively shipping out gold every month for the last six months, why does COMEX's data only show a drop of 7 tons?
Silver analyst Ted Butler has observed that demand for physical rather than cash delivery on futures contracts has been increasing. He said: "Yes, there were 2,100 contracts delivered in the January silver futures contract. That was very high, the highest I can remember, in a non-traditional delivery month. The traditional months for silver are March, May, July, September and December. The other seven months are non-traditional, although that is my terminology. These deliveries are highly indicative of physical demand, as it appears the buyers were the initiators of the transactions."
Do UK investors have a similar option?
So, while US investors are willing to brave the futures market to get their hands on physical metal, t his option is not open to UK investors for the simple reason that none of this metal is stored in the UK.
However, the UK is where
physical gold and silver ETFs stockpile their metal. Do UK investors have a cheap route into this?
ETF Securities, which also manages Gold Bullion Securities, has confirmed that it offers holders of shares in its ETFs a service that allows investors to turn their shares into physical gold, silver, platinum and palladium.
There is a possibility that using this service could by-pass fees of 10-15 per cent, which brokers charge for buying and selling gold. Tony Baird of Baird & Co would not comment on whether redeeming ETF shares for physical metal was a cheaper route to owning real gold than his service.
Adrian Ash of BullionVault.com said that the process would be highly complex to carry out and may not be any cheaper. He also said that physical ETFs diminish as time passes as the underlying gold is used to pay storage fees. However ETF Securities said that this NAV issue was the equivalent of the fees charged to hold physical gold. In other words an investor only paid for as long as they hold a 'physical' ETF share and the charges are not accumulated and passed on to new investors.
Ash said that BullionVault did not provide unallocated gold accounts and that he was suspicious of the process because it required transferring metal from an 'allocated' status [see next article for an explanation of unallocated gold accounts], inferring ownership of a specific piece of gold in a vault, to 'unallocated' status, where gold of a certain value is owed essentially through a credit note.
[Wow. So if an investor redeems his Gold ETF shares (in London), he gets a gold IOU. If there is real gold in London's ETFs, why don't redemptions produce physical/allocated gold?]
It was suggested that this move into unallocated gold accounts might be the result of ISA rules regarding physical assets [Bullshit]. ETFS said that all of its products apart from GBS were eligible for inclusion in ISAs, and that the reason the GBS was excluded was because of a slight difference on the
physical [paper] redemption process.
ETFS offers the service in PHAU (gold), PHAG (silver), PHPT (platinum), PHPD (palladium), PHPM (basket of physical commodities) with a fee at Ł500 maximum per redemption of any size, while GBS (gold) has the same service at $750 per redemption of any size and its Australian gold product for $1000.
Physical, ETF or something else?
He said: "Gold ETF providers state that individuals can take physical delivery of gold. This has rarely been done and is certainly not encouraged. The physical gold, if demanded, is placed into "unallocated bullion" accounts. This means the investor has a "general entitlement" to the gold. Just like the fractional reserve banking system ETF providers are relying on the fact that investors will not all demand their gold at the same time. There is a counterparty risk with an ETF. Should the provider go into bankruptcy, the investor will become a creditor. Being involved in a liquidation process would be extremely worrisome."
"Like a bank they may well be unlikely to deliver. The providers also state that they reserve the right to settle on cash not bullion terms under certain or extreme market circumstances. The purpose of investing in Gold is to have one's assets in a definable hard asset, not a paper asset, at such times. The ETF defeats the object and may expose the investor to loss of their investment." [Agreed]
Investors Chronicle explains unallocated gold-storage accounts.
Unallocated gold-storage accounts
When a bank sells you gold but holds it in safe-keeping, the account is almost always "unallocated". This makes you a creditor, just like a cash depositor, but without any government-backed insurance. Unallocated gold thus puts you "on risk" for the bank's financial survival, because the bank owes you metal which you don't own. The giveaway here are the words "free storage", since there need not be any gold stored for you. Whereas "allocated" gold is physically held in safe-keeping, but belongs to you outright, and costs you a monthly or annual storage fee that includes insurance.
Nuwire Investor reports about gold ETF holdings.
Thursday, April 30, 2009
More Gold News...
Posted by: The Mess That Greenspan Made @ 11:27 AM
The World Gold Council just released the newest Gold Investment Digest, and it contains a lot of great information about Gold, and the Gold market. Tim Iacono walks us through some of the main points, and adds his own insight, in his blog post below.
Always a sucker for a good chart [me too], particularly when it involves precious metals, the one below in the most recent Gold Investment Digest from the World Gold Council is a doozy.
[90% of ETF gold is (supposedly) kept in London in HSBC's vaults. Which means an incredible amount of paper gold is being sold, as witnessed by all the yellow (ie: GLD) in chart above.
There are only two gold ETFs I consider safe:
ZKB Gold ETF - SWX
Julius Baer Physical Gold — SWX
These two Swiss ETFs are buying up gold in London and transferring it
(CEF gold is a closed-end fund, not an ETF which tracks gold (notice how it isn't included in ETF chart above). I consider it safe too.)
The trade group's first quarter report on gold has some rather interesting statistics related to the quickly changing supply and demand situation.
As shown above, inflows to the many gold ETFs around the world have been brisk:
Investors bought 469 tonnes of gold via this channel, dwarfing the previous record, of 145 tonnes, set in the third quarter of last year. SPDR®Gold Shares ("GLD") enjoyed the bulk of the inflows [Without the huge amount of gold demand sucked up by GLD, gold manipulation efforts would have already collapsed]. The total amount of London Good Delivery bars held by the Trust increased to 1127 tonnes at the end of Q1 09, from 780 tonnes at the end of last year. The two Swiss listed gold ETFs (the ZKB Gold ETF and the Julius Baer Physical Gold Fund) enjoyed the next strongest inflows, rising by 37 tonnes and 32 tonnes respectively [not surprising, as they are actually backed by physical gold, unlike GLD.]. Inflows into the gold ETFs continued to grow throughout the quarter, despite the downward correction in the gold price, indicating that, as in past price corrections, ETF holdings tend to be "sticky".
It's kind of ridiculous just how big the SPDR Gold Shares ETF (GLD) has become when compared to the nine other funds and they have certainly characterized the inventory correctly in light of recently faltering prices - "sticky" is the right word.
As noted here yesterday, just 23.2 tonnes of the almost 350 tonnes added earlier in the year have exited the trust as the gold price declined from almost $1,000 an ounce in early February to current prices of just over $900
Trustnet reports about ZKB's security premium.
$4bn Swiss Gold ETF:
Paranoia [security] premium or plain expensive?
By Rob Mackinlay 19-May-2009
[ZKB is one of the two ETFs I consider safe]
One of Europe's largest and fastest growing physical gold ETFs is facing an industry backlash after suggesting that its higher trading costs are justified because its product is 'safer', in a case that throws the spotlight on charges paid by investors for different funds holding the same underlying asset.
The performance of physical gold exchange traded funds (ETFs) should not deviate much as they all aim to track the same underlying commodity and many of the products charge the same 0.4 per cent annual management fee.
This leaves investors with a handful of factors to consider when choosing a physical gold ETF, including trading costs and security. For buy and hold investors - and the many extremely risk averse investors buying these products - security is the key. For investors looking for quick returns, the trading cost will be the decider.
Until now investors would not have seen these two issues as being in conflict. But statements by Swiss ETF provider ZKB have raised the stakes by suggesting that this is indeed the case - security versus trading costs - and the ETF industry is now embroiled in a debate over the merits of the argument.
With many physical gold ETF investors paranoid about fundamental security issues (Could owning gold be banned? Hedge fund warning) anything that eases their minds could command a premium. One of Europe's largest and fastest growing gold-backed ETFs, the Swiss ZKB Gold ETF, has sparked a heated debate by suggesting that its product does just this, and that it is safer than its peers [It is safer than its peers. Or rather its peers are selling paper gold].
The broker role
ZKB claims that its products have achieved this extra degree of safety by ditching the multi-broker mode l which allows lots of market makers to create ETF shares and which injects competition into trading the products. With an estimated third of ZKB's $4bn assets under management coming from outside Switzerland, Foreign investors appear to be willing to pay this
paranoia [security] premium.
ZKB's claims have infuriated a number of ETF industry participants [fraudsters hate being exposed]. Open shows of deep disagreement between asset managers are rare, particularly when the assets under management are in the $billions. The debate sheds light on the issues at stake for most ETF investors, particularly as swap based ETFs do not use the multi-broker model (Will iShares sale cost investors?)
The ZKB product does not use the conventional multi-broker model in which several market makers are able to create and redeem ETF(exchange traded funds) shares.
Shares in physical gold ETFs represent a lump of metal in a vault. If the price of the gold share rises above the price of the physical gold that backs it, a market maker can profit by buying more gold, creating more shares, and selling these shares at a higher price than the gold they bought.
If the ETF shares are cheaper than gold the process is reversed: the market maker profits by buying the cheap shares, destroying them and selling the redeemed gold at a higher price.
The process prevents ETFs from trading at a premium or a discount to net asset value ensuring that it tracks the value of the underlying commodity. The existence of more than one market maker also introduces competition to the bid/offer spreads.
ZKB says it has retained the role of sole market maker because having several market makers introduces risks [it does]. ZKB acknowledges that this may add costs for investors but claims that investors are prepared to pay to have risk removed.
Debbie Fuhr, global head of ETF research & implementation strategy at Barclays Global Investors (currently in the process of selling iShares, the world's largest ETF provider which uses the multi-broker model) said: "Embracing a multi-broker dealer model has been one of the positive and important features of ETFs. It allows investors to request price quotes from multiple brokers and to trade with multiple brokers."
Market makers have also expressed concern about the product. One market maker said that the wider spreads on ZKB products enabled his firm to make more money buying and selling ZKB Gold ETF but pointed out that this was a cost to investors.
Another industry participant, who did not want to be named, said that the ZKB product should not be called an ETF and claimed that it traded at a premium to its NAV.
ETF Securities, Europe's largest provider of commodity-based ETFs has provided a full response to ZKB's claims which can be seen below. ETFS has over $6bn assets under management in its two bullion-backed ETFs: $3.9bn AUM in its GBS physical gold backed ETF and $2.5bn AUM in its PHAU ETF.
Trustnet asked Hugo Stalder, product manager at ZKB, if he accepted that other products were cheaper to trade. He said: "The question is what do you mean by cheaper? Our management fee is 0.4 per cent and most of the others are the same. The spread has a maximum of 0.5 per cent, sometimes narrower. Looking at other products, they may be narrower. (ETF Securities says its equivalent products have a 0.05-0.10 per cent spread)
"I know some of these criticisms. We have been asked by some foreign brokers who like to make markets — you can make money from market making — but we are not interested in having different market makers in foreign places."
Asked why investors were prepared to pay extra, Stalder said: "They are not looking for the cheapest price but for the best security. You may say it may cost a little bit more, this may be true.
"If someone is looking for the best security he looks at our ETF with a spread of 0.5 per cent and he may look at iShares where he's not sure he has full coverage of gold." Stalder said that this was not his view, but the view of some of ZKB's clients. A spokesperson for iShares would not comment on the claim.
He said: "There is no stock lending and no naked selling and the risk of this is kept to a minimum because it is all done via ZKB [This is key. ZKB does not allow naked short selling by a dozen market makers, like other ETFs]. That is why we don't like to have any other formal market makers, more so we can control that we have full coverage of gold. If you have foreign market makers you don't have full control any more."
Hector McNeil from ETF Securities said that this system did not add security and that for larger trades the opposite may be true: "Swiss gold funds (ZKB) cannot cover the trading with gold straight away. Gold trades T plus 2 (a two day delay) Loco London, Loco Zurich is even longer potentially [but INFINITELY safer than Loco London]. If they sell the shares to a customer then the customer has counterparty risk to the Swiss fund for probably significantly longer than two days." [Hector McNeil is right about one thing. Covering the trading in London ETF's like GLD is infinitely faster than covering at ZKB. That's because the "buying physical gold" phase gets skipped.]
"It should also be known that gold trades and clears loco in London. Loco Zurich is much less liquid and costs more money [Loco Zurich is superior to London, by far in terms of safery (keeping your gold in the vaults of a bankrupt government is pure stupidity). A premium is to be expected]. Therefore if a client wants a large trade the likelihood is that the gold will have to be sourced in London and moved to Zurich [helping end gold manipulation]. This has its own set of logistics, costs and risks." [Sure there is risk in transferring gold out of London. However there is much, MUCH more risk in keeping gold stored in Lo ndon.]
"They cannot cover all the time. If they get buyers they cannot immediately buy allocated gold. It takes several days to settle and probably one day to allocate."
McNeil said: "ETF Securities fundamentally believes that an ETF can only be called an ETF if it has an open creation and redemption model with multi authorised participants/market makers. ["multi authorized participants" only works if those participants aren't corrupt Wall Street broker dealers.]
"Issuers should provide a multiple market maker model which provides true liquidity and fair pricing through the ability to arbitrage mis-pricing and compete for business. There are some products, notably in Switzerland, where the issuer of the product is also the promoter, custodian and market maker with no independents. [The lack of involvement from Wall Street is worth it.]
"This is a really bad model as it has huge conflicts of interest. It is clear this model is very bad for investors as there is always the risk that the market maker prices his product at a premium. This is effectively raising the cost to investors dramatically without transparency [You DARE talk about transparency? There is NO transparency in London's gold market.]. Looking at some of the products in question this can run into multi millions of dollars of extra costs to investors.
"We believe the exchanges have a key role here. They should have as part of their listing requirements that Issuer have open market making models allowing true competition and arbitrage. They should dictate that there are at least two independent authorised participants/market makers. The products in question do not allow that. The bank is the only one. What is really bad is most investors are unaware that this is even happening so we welcome transparency. [Wall Street's business model revolves around selling imaginary assets. They do it in stocks, ETFs, commodities, and even treasuries. They use their role as "market makers" to sell these imaginary assets. So investment like ZBK which cut them out and don't let them "make the market" are a threat to them, which is why they are throwing so much bullshit at ZBK in this article.]
"Looking at the single market maker model investors need also to understand that they are hugely exposed from a counterparty basis. This is due to the fact that the only way they can buy or sell the product is through that single bank counterparty. As we know from events in September 2008 that single point of failure is no longer tenable." [Wall Street's corrupt broker-dealers represent the risk to be avoided at all cost.]
China Mining shares this about Julius Baer's year-old gold ETF.
Swiss asset manager Julius Baer has a nice gimmick to attract the more paranoid investors in its year-old gold ETF. "There is a webcam in the store. When you buy the ETF, you get an access code, so you can log on and see your gold," says Stefan Angele, head of investment management at Julius Baer. "People are very worried about the fiscal situation. They want to go back to the gold standard because they don't trust central banks," he suggests, referring to Switzerland's recent decision to intervene in the market in an attempt to weaken the franc.
[This is the second ETF I consider safe.]
Finally, below is the 24 hour gold chart for Wednesday, Thursday, and Friday. Notice how gold has reached 972.
My reaction: The points to take away from this are:
1) More and more US investors are turning to the futures market when they want to buy physical metal at the lowest prices
2) More restrictions being applied to overseas buyers for deliver of COMEX gold
3) Buyers are having to wait more than two weeks to take delivery as delays and complications in the process have become increasingly commonplace
4) These delays and complications are even more frequent now then during the Christmas season, where interest in taking delivery of COMEX gold increased significantly
5) Although warehouse facilities themselves confirm large gold outflows every month, the activity does not show up on COMEX warehouse stock data. Over the last six months, total gold in COMEX warehouses decreased ONLY 3% or 7 tons (237,000 oz). See for yourself:
COMEX Gold Stocks - October 30, 2008 (total=8.56 million oz)
COMEX Gold Stocks - May 29, 2009 (total=8.32 million oz)
These excel documents were downloaded directly from NYMEX's website.
6) The physical gold redeemed from ETFs in London is placed into "unallocated bullion" accounts (gold IOUs). If these London ETFs were truly backed by real gold, they would produce physical/allocated gold upon redemption.
7) The providers of London's gold ETF also reserve the right to settle on cash not bullion terms under certain circumstances.
8) There are only two gold ETFs I consider safe:
ZKB Gold ETF - SWX
Julius Baer Physical Gold — SWX
9) These Swiss ETFs are slowly moving gold out of London and into Zurich (70 tons so far this year).
Conclusion: On top of investor demand prying gold out London and COMEX vaults, you have Germany and Switzerland demanding the return of their custodial gold from the US, and Dubai planning to withdraw its gold from London. With this type of demand, the US/UK will soon run out of gold.
Finally, there is overwhelming evidence that COMEX inventory numbers are completely bogus. The real amount of physical gold available to meet delivery demand is probably far, far lower than officially reported. In fact, gold prices rising towards 1000 for a fourth time is probably a sign that they are just about out.