In Defense of GLD

One group of people that's even more fanatical than the Goldman Sachs (GS) conspiracy theorists are the Goldbugs. As I read David Einhorn's (Greenlight Capital) quarterly letter last night, one thing jumped out at me:

We made a couple of modest changes to our macro hedges. First, after extensive investigation, we switched our entire GLD exchange traded fund position into physical gold. At a minimum this will provide some savings as the costs of storing gold are less than the fees on GLD.

Now, I happen to believe in GLD as a product. I have read the prospectus multiple times, which states that the GLD owns physical gold bullion - not gold futures or other paper versions of gold. GLD shares can actually be redeemed for physical gold bullion (if you have enough shares). This doesn't stop the Goldbugs from trumpeting about how the GLD is NOT the same as gold, and that if you really want to own gold, you should buy bullion instead. Well, GLD is not gold - it's a share in a trust that owns gold, but the difference is that I actually believe that the trust owns the gold, while some Goldbugs think the whole thing is a giant scam.

Anyway, I'm CERTAIN that in the coming days, you'll be able to find some rantings about how Einhorn's "extensive investigation" which resulted in him swapping out of GLD and into bullion is evidence that there are problems with GLD. Look - I cannot guarantee to you that the GLD is a perfect product - I have not seen and audited the gold in their vault (although I am close to someone who works intimately with the GLD trust, and who offered me exactly such an opportunity, should I make it to London in the near future). However, Einhorn explained one reason for the switch - cost. He's got a sizable position, and the means to store physical gold, so he holds the cheaper version.

Also, I could interpret this as a validation of GLD. Although I don't know how Einhorn swapped his GLD for physical bullion - I'd be willing to bet he simply "redeemed" the GLD shares he had with the trust, and took delivery of gold bullion. This is great news for those who fear that the GLD is a paper pyramid - that Einhorn was able to do exactly what he was supposed to do - that GLD and gold are essentially fungible. Again, I can't be sure that's what Einhorn did, and if anyone has any evidence or inkling that he actually sold his GLD position and bought physical bullion, I'd LOVE to hear about it, as that would nullify my whole point.

We could also draw the conclusion that perhaps Einhorn plans to hold this position for a longer period of time - although, since GLD and gold are fungible, he could easily liquidate his position by shorting GLD and creating shares of the ETF with the trust to close out his position - relax, it's not as confusing as it sounds - you can take your GLD and give them to the trust in exchange for gold bars, or you can take your gold bars (redeem) and give them to the trust in exchange for GLD (create). In other words, the GLD is just a more liquid way for the average person (or the professional hedge fund manager) to trade gold.

Full disclosure: long GLD and SLV

And note to Goldbugs: PLEASE do not leave me comments saying that the GLD is fraudulent because it can be shorted - it's a false logic argument, and it's incorrect.

Comments

[Carlos Lam:]

Kid, you present defensible arguments for your position. Some of us, though, do not trust GLD. The trust doesn't let any shareholder knock on its door and ask to see the bullion. This is understandable as it would create logistical problems, but it also prevents the shareholders from personally verifying that the gold exists. In essence, the risk posed by that inability to personally verify an investment that supposedly tracks the price of gold is too much for me; I'd rather hold the actual asset and eliminate that particular risk.

Now, I know the retort: gold producers don't allow shareholders into the mines to see their equipment and ore. There's a difference between a gold producer and the actual asset. If I am a producer shareholder, I'm buying not just the ore in the ground but also the experience of the management team. Thus, the investments are RELATED but not the same. One is the asset itself, the other is the asset PLUS the management team.

Jul 17 03:03 PM

[kohalakid:]

While you are right to acknowledge that it's not logistically possible for every shareholder to inspect the gold held in GLD vaults, they do have an independent, outside auditor inspect it once a year and the trustee can inspect it twice a year. The GLD website has a link to the last report of the independent auditor, Inspectorate.

And as far as mining companies...remember Bre-X???


On Jul 17 03:03 PM Carlos Lam wrote:

> Kid, you present defensible arguments for your position. Some of
> us, though, do not trust GLD. The trust doesn't let any shareholder
> knock on its door and ask to see the bullion. This is understandable
> as it would create logistical problems, but it also prevents the
> shareholders from personally verifying that the gold exists. In
> essence, the risk posed by that inability to personally verify an
> investment that supposedly tracks the price of gold is too much for
> me; I'd rather hold the actual asset and eliminate that particular
> risk.
>
> Now, I know the retort: gold producers don't allow shareholders into
> the mines to see their equipment and ore. There's a difference between
> a gold producer and the actual asset. If I am a producer shareholder,
> I'm buying not just the ore in the ground but also the experience
> of the management team. Thus, the investments are RELATED but not
> the same. One is the asset itself, the other is the asset PLUS the
> management team.

Jul 17 03:30 PM

[Kid Dynamite:]

i applaud your due diligence and skepticism - that's certainly your prerogative. Although i'd take issue with your using gold miners as a proxy for spot gold... anyway - let's quickly talk about another thing - physical gold. When you buy physical gold, you can get ripped off - right? whatever chance there is - someone could send me a brass bar plated in 24k gold - i'd have no friggin' clue.

Bottom line for ME, is that i think the chance of being ripped off by the GLD is much lower than the chance of being ripped off buying physical gold bars (not to mention GLD is much easier to trade.).

if the GLD trust gets sold to FlyByNight Securities, and they move the gold to a warehouse in Secaucus, then the story would change.


On Jul 17 03:03 PM Carlos Lam wrote:

> Kid, you present defensible arguments for your position. Some of
> us, though, do not trust GLD. The trust doesn't let any shareholder
> knock on its door and ask to see the bullion. This is understandable
> as it would create logistical problems, but it also prevents the
> shareholders from personally verifying that the gold exists. In
> essence, the risk posed by that inability to personally verify an
> investment that supposedly tracks the price of gold is too much for
> me; I'd rather hold the actual asset and eliminate that particular
> risk.
>
> Now, I know the retort: gold producers don't allow shareholders into
> the mines to see their equipment and ore. There's a difference between
> a gold producer and the actual asset. If I am a producer shareholder,
> I'm buying not just the ore in the ground but also the experience
> of the management team. Thus, the investments are RELATED but not
> the same. One is the asset itself, the other is the asset PLUS the
> management team.

Jul 17 04:55 PM

[TERN:]

Thanks for this article. It is refreshing to see the other side of the argument that is so often repeated by the more paranoid goldbugs.

That said, I understand the desire of goldbugs to talk people into the physical too: it ensures less liquidity in the bullion market and thus more upward pressure to the prices.
If I had the physical bullion though, my liquidity would have to come from selling spot on the LME or perhaps futures to the COMEX.
I expect that will be Einhorn's strategy too. That he opts for the switch now, means that he thinks the spike may be several years away, making the carrying cost of GLD uneconomical.

Jul 17 07:35 PM

[Bron Suchecki:]

"Considering the Amounts of it, that I've read about, It is virtually impossible to move that much in the span of time given. And they seem to be able to purchase Tons at spot without affecting the market."

Two errors in this statement:

1. LBMA stats (www.lbma.org.uk/stats/...) report DAILY average CLEARING at 600t, and this is only one part of the over the counter market. The gold market has the liquidity to absorb GLD's trading.

2. The gold doesn't move between vaults, it stays sitting on its pallet and all that changes is who owns it. That is why London is the centre of the gold market, because it is so operationaly efficient. This is why all the ETFs hold their gold there, why Bullion Vault holds its gold there.

I can forgive a lay person for making this sort of comment, but the scary thing is that I have seen this statement being made by commentators who put themselves out there as experts. The problem is they may be experts in stocks or ETFs, but have zero experience in the physical precious metal markets and hence make all sorts of errors in analysis.

It is nice you have written to the Editors, kohalakid, but they have zero knowledge of PMs so can't tell when a contributor is talking 80% crap and 20% sense.

Jul 17 07:57 PM

[kohalakid:]

You and I have enough experience in the precious metals market to know the realities of how it works and what is a realistic argument and what is pure fancy.

What I have extreme objection to is those who take the argument past "gee, I don't trust anyone and prefer to keep my precious metals in MY possession" which is a perfectly reasonable and understandable way of thinking, and instead profess to know, suppose, or even speculate, based on half-truths, that GLD is a scam, a fraud, or illegal, or somehow a misrepresentation. That's a huge leap that there is not one shread of substantial evidence to support.
I offered the SA editors my phone number and enough of my time to take apart every point made in the JS Kim article.

On Jul 17 07:57 PM Bron Suchecki wrote:

> "Considering the Amounts of it, that I've read about, It is virtually
> impossible to move that much in the span of time given. And they
> seem to be able to purchase Tons at spot without affecting the market."
>
>
> Two errors in this statement:
>
> 1. LBMA stats (www.lbma.org.uk/stats/...) report DAILY
> average CLEARING at 600t, and this is only one part of the over the
> counter market. The gold market has the liquidity to absorb GLD's
> trading.
>
> 2. The gold doesn't move between vaults, it stays sitting on its
> pallet and all that changes is who owns it. That is why London is
> the centre of the gold market, because it is so operationaly efficient.
> This is why all the ETFs hold their gold there, why Bullion Vault
> holds its gold there.
>
> I can forgive a lay person for making this sort of comment, but the
> scary thing is that I have seen this statement being made by commentators
> who put themselves out there as experts. The problem is they may
> be experts in stocks or ETFs, but have zero experience in the physical
> precious metal markets and hence make all sorts of errors in analysis.
>
>
> It is nice you have written to the Editors, kohalakid, but they have
> zero knowledge of PMs so can't tell when a contributor is talking
> 80% crap and 20% sense.

Jul 17 09:36 PM

[tpp:]

This is really a question--have you seen your gold? If not, why do you think an assayer's certificate is better than a prospectus?


On Jul 17 10:14 AM 5142152-337 wrote:

> Hey Kid,
>
> This article is somewhat hypocritical, no? On the one hand you attempt
> to validate GLD as a vehicle for those interested in going that way,
> then on the other hand, you castigate those who believe otherwise
> (owning physical gold/silver).
>
> Look, you and the posters up to my post have made their choices.
> Good or bad...it remains to be seen.
>
> Don't chastise or belittle those who CHOOSE to avoid gold and silver
> ETFs like the plague. Why? Because we choose to. Its all about choices,
> Kid.
>
> Those of us who own physical gold and silver sleep well at night
> too, otherwise we would own GLD...yeah, right? When donkeys fly!
>
>
> See, you didn't read me blasting you, calling you names, etc. You
> made your choice, live with it!

Jul 18 12:12 AM

[goldrealmny:]

Am I supposed to take someone named "Kid Dynamite" seriously? Nice avatar - NOT. I imagine someone in their 20s who grew up thinking stock markets gained 10-20% every single year thanks to Alan Greenspan constantly printing money and lowering interest rates... I suspect you were pooping in diapers while people with REAL WISDOM and LIFE EXPERIENCE where learning how our monetary and political systems operated.

Anyone who doesn't have the intelligence to consider that REGARDLESS of what the prospectus says it is VERY POSSIBLE - even LIKELY - that the banksters who run these ETFs are LYING and engaged in FRAUD. Aren't these the same people who DESTROYED the economy and capital markets in the last few years?!?! Aren't these the people who as a matter of public record have engaged in massive manipulation and fraud - with lapdog (no COMPLICIT) govt regulators looking the other way?

For the love of all that is holy and good, I cannot understand why there is SO MUCH STUPIDITY AND GULLIBILITY in an arena supposedly populated by "professionals"!!! Or maybe these people are just PAID LIARS. That makes more sense to me.

Jul 18 12:48 AM

[Mao:]

Has anybody thought about this? If everyone own physical gold instead of ETFs. Then it will be impossible for big funds to short ETFs or future contracts of gold. As a result, gold price will be much higher than it is today.

Jul 18 03:24 AM

[Maxe Paul:]

WAKE UP! This is the line the gold bugs use to legitimize the conspiracy theory they carry on with. You want everyone to manipulate gold to rise!

IMO people who invest in gold then carry on that the ETF is a scam, shorting gold is a scam, the price should be thousands an ounce, mining stocks are no good, you cant take physical possession because the government will confiscate your gold is SOOOOO FUNNY.

I have absolutely no idea why people like this invest at all, totally emotional investors which is the number 1 no no when investing.

So according to these "experts" at investing you need physical gold, but stored only in a country you do not live in to avoid confiscation by the government of your country, but hey, London may be no good either, as they may confiscate it there too, so you need to have a deposit box in a country god knows where that your government cannot touch. Once this is done you can then sleep safe at night knowing you can sell your gold at the $5000 level (the top of course because you know it will be!) to buy your groceries, which you now exchange back to your currency but your currencies worthless! It all make perfect sense.

LOL. It's just so funny I'm rolling on the floor.


On Jul 18 03:24 AM Mao wrote:

> Has anybody thought about this? If everyone own physical gold instead
> of ETFs. Then it will be impossible for big funds to short ETFs or
> future contracts of gold. As a result, gold price will be much higher
> than it is today.

Jul 18 09:36 AM

[Market Sniper:]

I have no problem with the precious metals ETF being used as a pure TRADING vehicle. What I do find very interesting is that 2 banks are the largest sellers in the gold futures market and 2 other banks are the largest sellers in the silver futures market. Both have established a working short corner in their respective markets. Just a coincidence that these 4 banks are ALSO the trustees for the ETFs? Just a coinky-dink? I think not. No, I have NO intermediaries between my ownership of the physical metals as they are a store of wealth, real money as it were, and not to be traded.

Jul 18 04:04 PM

[kohalakid:]

You say the banks have established "working short corners"
in gold and silver.
But these banks are listed as Commercial Traders in the CFTC reports, meaning, by CFTC definition, that they are hedgers, not speculators.
If they were short specing the market they'd be listed in the Non-commercial Trader section along with the spec hedge funds.

I don't make this stuff up....go to the CFTC website.


On Jul 18 04:04 PM Market Sniper wrote:

> I have no problem with the precious metals ETF being used as a pure
> TRADING vehicle. What I do find very interesting is that 2 banks
> are the largest sellers in the gold futures market and 2 other banks
> are the largest sellers in the silver futures market. Both have established
> a working short corner in their respective markets. Just a coincidence
> that these 4 banks are ALSO the trustees for the ETFs? Just a coinky-dink?
> I think not. No, I have NO intermediaries between my ownership of
> the physical metals as they are a store of wealth, real money as
> it were, and not to be traded.

Jul 18 04:12 PM

[Maxe Paul:]

Also don't mention Bank gold-linked prepayment facilities with mining companies as hedge strategies. Your just wasting your breath with people who never check the facts.


On Jul 18 04:12 PM kohalakid wrote:

> You say the banks have established "working short corners"
> in gold and silver.
> But these banks are listed as Commercial Traders in the CFTC reports,
> meaning, by CFTC definition, that they are hedgers, not speculators.
>
> If they were short specing the market they'd be listed in the Non-commercial
> Trader section along with the spec hedge funds.
>
> I don't make this stuff up....go to the CFTC website.

Jul 19 08:15 AM

[Market Sniper:]

What are they hedging, kohalakid? These banks hold most of the short positions. It seems when private individuals do this, a-la Hunt Brothers, the Wrath of Khan comes down on them. It is not a true hedge position. They are not producers or consumers of the metals. They are "simply" the TRUSTEES for the ETFs.


On Jul 18 04:12 PM kohalakid wrote:

> You say the banks have established "working short corners"
> in gold and silver.
> But these banks are listed as Commercial Traders in the CFTC reports,
> meaning, by CFTC definition, that they are hedgers, not speculators.
>
> If they were short specing the market they'd be listed in the Non-commercial
> Trader section along with the spec hedge funds.
>
> I don't make this stuff up....go to the CFTC website.

Jul 19 02:58 PM

[kohalakid:]

They are hedging either physical metal held by them, which can be held in the form of COMEX warehouse receipts, unregistered COMEX silver, forwards contracts, physical metal stored in London or anywhere else on the planet they might hold it for their dealing and market making purposes, or bank hedging future mine production as part of their bullion bank operations.

They don't need to be exclusively "producers or consumers". CFTC says they need to be "engaged in business activities hedged by the use of the futures or option market."

I'm a hedge trader and have filed reportable positions a few times as a Commercial Trader. I don't produce or consume any metal, just buy and sell it on a wholesale basis.

The Hunts were speculators, pure and simple. A bank listed as Commercial Trader is a hedger by CFTC definition. That they also are trustees of an ETF is a separate point and sure seems logical for them to be trustee given the size and scope of their bullion operations.

On Jul 19 02:58 PM Market Sniper wrote:

> What are they hedging, kohalakid? These banks hold most of the short
> positions. It seems when private individuals do this, a-la Hunt Brothers,
> the Wrath of Khan comes down on them. It is not a true hedge position.
> They are not producers or consumers of the metals. They are "simply"
> the TRUSTEES for the ETFs.

Jul 19 03:09 PM

[Glen L.:]

" i applaud your due diligence and skepticism - that's certainly your prerogative. Although i'd take issue with your using gold miners as a proxy for spot gold... anyway - let's quickly talk about another thing - physical gold. When you buy physical gold, you can get ripped off - right? whatever chance there is - someone could send me a brass bar plated in 24k gold - i'd have no friggin' clue"

Yes, you can get ripped off in any transaction, especially if you're an idiot. I'd have a friggin' clue as soon as I weighed the bar, since gold has a specific atomic weight that is, well, elementary...

Now, if a gold dealer sent me product that didn't measure up, he would not be in business very long. I'm not sure you could say that about a gold broker who issues you a promissory note. Weigh that, sucker.

Jul 20 12:37 AM

[Bron Suchecki:]

You have a lot of patience, kohalakid.

Jul 20 10:12 PM

[kohalakid:]

Some will learn and understand and see through the hype used to sell newsletters.

Others won't see or don't want to see.

I hope I can help a few of the first group to be better, more knowledgeable precious metals investors/traders.


On Jul 20 10:12 PM Bron Suchecki wrote:

> You have a lot of patience, kohalakid.

Jul 21 08:19 AM

[gold man:]

Also, if you notice on the spdrgoldshares.com website, they are now showing the Inspectorate reports on the bullion holdings sitting in the HSBC vault in London. I guess this would be one more bit of evidence showing that the gold actually does exist and ties-in with the custodian's records.

Aug 04 03:36 PM

[gold man:]

How much bullion do you need to hold in allocated form in a vault before they let you in to inspect it? I would think it's probably near $100 million holding before they even consider it. For those investors who think it's better to hold allocated bars instead of GLD, aren't you exposed to the same risks as holding GLD - that the gold really isn't there? So I guess the real solution is to buy your own bars in the OTC market and hold them in your own vault at home?


On Jul 17 03:03 PM Carlos Lam wrote:

> Kid, you present defensible arguments for your position. Some of
> us, though, do not trust GLD. The trust doesn't let any shareholder
> knock on its door and ask to see the bullion. This is understandable
> as it would create logistical problems, but it also prevents the
> shareholders from personally verifying that the gold exists. In
> essence, the risk posed by that inability to personally verify an
> investment that supposedly tracks the price of gold is too much for
> me; I'd rather hold the actual asset and eliminate that particular
> risk.
>
> Now, I know the retort: gold producers don't allow shareholders into
> the mines to see their equipment and ore. There's a difference between
> a gold producer and the actual asset. If I am a producer shareholder,
> I'm buying not just the ore in the ground but also the experience
> of the management team. Thus, the investments are RELATED but not
> the same. One is the asset itself, the other is the asset PLUS the
> management team.

Aug 04 03:44 PM