Where Does the Gold ETF Get Its Gold?

One of the most commonly heard "theories" about how the world's most popular gold investment product - the SPDR Gold Shares ETF (NYSEArca:GLD) - is defrauding investors is that the trust can't possibly contain the gold they say they have because there is no evidence of any transfers of this size on any gold market.

The logical conclusion, of course, is that the ETF is a sham.

All it takes is a simple phone call to completely debunk this "theory", something that, to my knowledge, no one has bothered to do until about an hour ago when I picked up the phone and began dialing after quickly locating the contact page at the GLD website.

Anyone wanting to cast doubt on the quantity and/or quality of the bullion backing the gold ETF should start looking at HSBC (Hong Kong and Shanghai Banking Corporation) instead of the Comex or any other gold market because that's where the gold transfers occur.

In quite a pleasant conversation with Natalie Dempster, Head of Investment in North America for the World Gold Council, it was learned that most of the purchases made by "authorized participants" on behalf of the trust result in gold being transferred from "unallocated" accounts to "allocated" accounts for the trust at HSBC in London.

Since these are internal transactions, records are not made public.

That's why no one can "see" where the gold is coming from.

As noted on many occasions before, it is my firm belief that if you really want to "own" gold, you should buy the stuff in physical form and then put it somewhere safe. Anything short of that - whatever you buy and from whomever you buy it - is a distant second to this option if your aim is to ensure that the stuff is really there.

Now, I have no idea whether HSBC is doing what they say they're doing or whether they are another Bernie Madoff outfit, filling out all the proper paperwork and putting smiles on their customers' faces until the day eventually comes when they are revealed to be another massive fraud.

Maybe someone should call HSBC and ask them for these records.

But, to simply say that the ETF can't have the gold they say they have because no one can see these transactions on any market, yet no one bothered to pick up the phone to ask the people who run the fund just why that might be .... well, that's about the sloppiest bit of logic and the worst financial writing I've come across lately.

[Note: For those of you haven't already seen it, there is a highly informative and recently expanded list of Frequently Asked Questions at the GLD website.]

Comments

[youngman442002:]

How did you get that picture of my basement....I must have left the door open again.....

Mar 26 06:07 PM

[Vuke:]

This article simply begs the question:

Where is all the "unallocated" gold coming from?

Mar 26 07:27 PM

[jeffc:]

In equity, I have heard how the some inscrupulous hedge fund managers naked short sell stocks (sell stock without borrowing from a lender). What is interesting is how the number of oustanding shares can be greater than reported float because someone sold stock did not close out their position. This can leads to a lower share price (greater supply of shares). The SEC claims it is not a real problem and rarely occurs. And overstock is a reported victim - google "overstock short sales" and 60 minutes also did a piece on them.

That said, yes I can imagine some folks naked short sale or sell leased gold for the easy money. At least if the gold is leased, and they party is wise enough to purchase gold options (insurance) at a cost less than lease rate than the party will make safe tidy profit on it. I see one problem if a party is naked short selling gold (is that even possible?), which won't become an issue until one party become insolvent when gold moves dramatically and than SEC will forced to become involved. And who knows, maybe even regulate gold?

Mar 27 12:12 AM

[jeffc:]

The point I wanted to raise is that naked short selling or leasing with covered options/futures would increase the amount of gold though this has high risk if the price doesn't head the way you want. Leasing gold with options or futures nullfies the risk and the counter party of the option will need to fulfill the contract for the gold.

Mar 27 12:18 AM

[blog.kerdos...:]

If you MUST own gold, and you refuse to understand that energy and agriculture are much better investments, then go to Sotheby's and Christie's auctions and buy gold jewelry signed by Cartier,Tiffany, Van Cleef, Bulgari, etc. The premium you pay over pure gold content is worth it as these pieces will appreciate much more than a bar of gold.
They are portable, fine pieces of art, and also great gifts for "that certain woman". Investing should also be fun and not just dollars and cents.

Mar 27 04:55 AM

[ssgchester:]

Haa haa haa someone should call HSBC and ask for their records...haa haa haa
I'm sure there are tons of people out there who would love to see them. Specially in London.
They've cut credit limits on their credit cards, which screwed it's card holders credit ratings, they have an 18 BILLION CASH OUT, and they bought Household Finance and got stuck with a 14 Billion dollar pig in a poke.
Yup...would love to see their records.

Mar 27 05:15 AM

[Philman:]

If the folks at GLD say that they are transferring gold from unallocated accounts to the allocated account of the ETF, they ARE ADMITTING TO FRAUD!

Kitco, for example, runs an unallocated gold sales scheme, and uses the ostensible HSBC warehouses to store the alleged unallocated gold. It sells shares in what is, apparently, another Ponzi scheme (according to the results of your phone call) to innocent investors who believe they are investing in gold bars which, although not assigned specifically to them, at least exist. When, however, HSBC transfers the gold from Kitco's unallocated account into the ETF, it and Kitco (if the latter is aware of the transfer) defraud the investors in the unallocated accounts, and, potentially, to the investors in GLD.

A bankruptcy judge would certainly order a return of this gold to the Kitco account for the benefit of creditors, if Kitco went bankrupt, and could impose a constructive trust upon it, requiring a return of the fraudulent transfer, in the event an investor sued Kitco or HSBC or both.

In short, if the information that Tim Iaconno is reporting is correct, then the Kitco gold "pool" as well as the HSBC stored GLD ETF are both Ponzi schemes in which one investor is being paid off by using the investment in gold that belongs to other investors now or in the future. This should be immediately reported to state prosecutors in both New York and Canada, so further investigation can be pursued, and the culprits who are behind the scheme are brought to justice.

Mar 27 05:35 AM

[huskerbob:]

First off, thanks for another informative article. You provide a lot of good information on Seeking Alpha.
But second, I don't think this article will reassure anyone wary of GLD. You made a phone call and they said everything was fine? OK, good enough for you. but it would probably be better if they just allowed an effective audit, which is another reason people don't trust GLD.
Please read Trace Mayer's article on GLD. A quote: "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’."

Mar 27 07:23 AM

[Conan the B...:]

New SA article by Avery Goodman regarding NYSE gold stocks, addresses a similar issue.

It continues this thread on our Own shores, includes a little known rule, some wording changes and makes me wonder whether there is double counting involved.

Loans/leases of Gold from GLD electronically even as HSBC electronically moves from Unallocated to Allocated Electronically.

How much gold is actually out there, when none can be had by individuals yet Tons move each day?

Mar 27 09:06 AM

[5142152-337:]

Tim,
First, thank you for stating that PHYSICAL gold is the way to go. I agree.

For one to be cautious, or to doubt what is being said to be safe in the investment world cannot be dismissed.

I personally don't trust anything I can't hold in my hand, period. And I don't mean PAPER of any kind. Why? Because I am a quick learner. Touching a stove that has a pot of boiling water on it is going to be hot! Ergo, keep your fingers away even if your broker tells you it won't hurt for long...

Mar 27 09:10 AM

[Tim Iacono:]

There's a good description of "unallocated" and "allocated" accounts at the GLD FAQ:

www.spdrgoldshares.com.../

You should probably read it as I don't think you understand the difference.


On Mar 27 05:35 AM Philman wrote:

> If the folks at GLD say that they are transferring gold from unallocated
> accounts to the allocated account of the ETF, they ARE ADMITTING
> TO FRAUD!
>
> Kitco, for example, runs an unallocated gold sales scheme, and uses
> the ostensible HSBC warehouses to store the alleged unallocated gold.
> It sells shares in what is, apparently, another Ponzi scheme (according
> to the results of your phone call) to innocent investors who believe
> they are investing in gold bars which, although not assigned specifically
> to them, at least exist. When, however, HSBC transfers the gold
> from Kitco's unallocated account into the ETF, it and Kitco (if the
> latter is aware of the transfer) defraud the investors in the unallocated
> accounts, and, potentially, to the investors in GLD.
>
> A bankruptcy judge would certainly order a return of this gold to
> the Kitco account for the benefit of creditors, if Kitco went bankrupt,
> and could impose a constructive trust upon it, requiring a return
> of the fraudulent transfer, in the event an investor sued Kitco or
> HSBC or both.
>
> In short, if the information that Tim Iaconno is reporting is correct,
> then the Kitco gold "pool" as well as the HSBC stored GLD ETF are
> both Ponzi schemes in which one investor is being paid off by using
> the investment in gold that belongs to other investors now or in
> the future. This should be immediately reported to state prosecutors
> in both New York and Canada, so further investigation can be pursued,
> and the culprits who are behind the scheme are brought to justice.

Mar 27 09:12 AM

[xprocowboy:]

I don't want anyone holding my gold or my guns. IF, I need them, so will everyone else and the worst will have come to pass. I buy gold for protection, not profit. I am not yet socialist enought to trust anyone else to care for me or my family if/when the bottom falls out.

Mar 27 09:35 AM

[Benalcazar:]

BrunoT,

That's probably because they do so much business that it doesnt pay to spend the time answering these questions.

For a good dissection of GLD take a look James Turk's analysis here (note that as founder of GoldMoney he has his own agenda):

goldprice.org/james-tu...
www.financialsense.com...

Mar 27 10:48 AM

[5142152-337:]

Tim,
Read Avery Goodman's article that the NYSE has run OUT OF GOLD! Gee, wonder what those holding those pieces of paper do now? ANSWER: ITS EASY, they (NYSE) will give you an IOU!!!!!!

Hey Tim, I have some acreage here in Florida that I will sell you. No need to come down. I'll send you a PICTURE!

Full disclosure: The land IS HERE! At least that's more than the NYSE can say! Go figure?

Mar 27 11:40 AM

[searcher:]

Those who obsessively speculate on the motives and mendacity of 'others' are not really interested in putting their assertions to the test. It is merely a psychological 'acting out' in an attempt to alleviate inadequacy anxiety. Relax, I'm just messin' with you; a little.

Mar 27 03:00 PM

[Tim Iacono:]

A simple search on the internet reveals that Natalie Dempster is a widely quoted spokeswoman for the World Gold Council.

Mar 28 07:55 AM

[secmaven:]

The GLD prospectus allows the fund to invest in gold and "gold investments". Does the tonnage that GLD reports constitute bullion or paper gold? Legally it can be a mix of both. Further, under the prospectus no auditor can physically see the gold allegedly held by sub custodians without their permission. The Central Fund of Canada must hold physical and the price of that investment carries a premium to spot. GLD sells at a discount. These facts should tell you everything you need to know about the GLD scam. When the truth is revealed by Morgan Guaranty, the custodian it will be too late. The price of gold will already have taken off. That will be in the fall. Between now and then watch for JP Morgan to take the price down to $800 by paper trading the Hell out of it. The new IMF reserve currency needs cheap gold to get off of the ground and high priced gold after wards to make it acceptable. Part of the deal on that currency is that all central banks will agree to deposit their gold with the IMF in exchange for a certain quantity at an $800 price. Once the exchange is complete gold will be revalued upward internationally, just like FDR did and the IMF currency will have serious value.

Mar 28 10:31 AM

[Tim Iacono:]

According to the bar list on the GLD website, 99.8 percent of the 36 million ounces is held in allocated bar form.

Mar 28 12:31 PM

[Bob Mayo:]

They publish a list of the specific bars owned by the trust: www.spdrgoldshares.com... .

Apr 02 10:19 PM

[JeroenG:]

Hi Tim,

Please read this article:
arabianmoney.net/2009/.../
This kind of journalism bashes physical gold owners!!
Why not let the author know what you think about his writings :-)

Greetings from a physical gold owner.

Nov 12 04:50 AM