Given the amount of time I spend on my own writing (and the research that entails), I don't spend as much time reading what other commentators are saying about the precious metals sector as I used to. However, I was doing a little poking around when an article by Adam Hamilton caught my eye: GLD Conspiracy Theories.
Having considerable respect for the work of Mr. Hamilton, I decided it was certainly worth my time to see what he had to say on this issue – given that I have been extremely vocal in expressing my concerns over the legitimacy of these bullion-buying vehicles. I admit to being frankly shocked.
Mr. Hamilton went on a long tirade, looking to belittle those who doubt these funds at every opportunity, during which time he constructed no less than eleven sub-arguments – which he supposedly rebutted. And after going to the time and effort to construct and rebut those eleven “arguments” he never mentioned the bullion-banks once.
I simply have neither the time or desire to respond to all of Mr. Hamilton's specific “counter-arguments”. I encourage those who want to know everything said about this to go straight to the source (in the link above). I submit, however, that the vast majority of these arguments are what are known as “straw men”.
This is a commonly used technique in faulty arguments. Someone wishing to establish his own position attempts to do so through “rebutting” the arguments of those with opposing views. However, instead of choosing the strongest arguments of his opponents, he chooses the weakest ones – or simply invents his own “arguments” to rebut. This is what Hamilton has done here.
Those familiar with my own writing know that I have written several commentaries challenging the legitimacy of bullion ETFs without ever using any of the supposed “arguments” from Mr. Hamilton's commentary. I'm not saying that no one is using any of those arguments, however several of the eleven sub-arguments are certainly topics I have never seen discussed before.
Let me try to incorporate some of what he has said into my own analysis, and I'll let readers decide for themselves if his views on this subject detract from my own analysis. Mr. Hamilton points out that GLD was founded by the World Gold Council, which, itself is “an industry association funded by the world's leading gold miners”.
I will briefly point out that Jim Sinclair (and others) are convinced that several of these “leading gold miners” were involved in gold-hedging and gold-derivative agreements which directly served the interests of the anti-gold cabal – by providing them with countless tons of gold to dump onto the market which had not even been dug out of the ground. However, I will go no further down this line of reasoning since it is not necessary to discredit those running GLD in order to cast doubt on the fund, itself.
Since Mr. Hamilton never talked about the bullion-banks, he also never mentioned the huge “custodian agreements” which GLD has entered into with the bullion-banks – the same bullion-banks who are the largest “shorts” in the history of commodities. Since Mr. Hamilton never thought to ask this question, I'll ask it myself: why didn't the gold miners who founded GLD simply choose to hold and store their own bullion?
There are only a very limited number of possibilities here, so I will try to cover the bases. The most obvious explanation strongly supports my own position: the bullion banks offered to supply GLD with infinite amounts of bullion for a minimal cost – and essentially no profit to themselves. As I have pointed out on other occasions, it is difficult for me to decide which aspect of this premise is the most ludicrous: that the largest shorts in history would create a trading vehicle to help longs enter the market, or that bankers would do anything for virtually no profit for themselves.
We know that the bullion-banks are performing this huge service virtually free of charge, since if they were taking a large profit for themselves out of this arrangement there could be no possible advantage to using these bullion-banks – since GLD could hold/store bullion more cheaply, itself, if the banks were gouging it on the custodian agreements.
What other possible reason could the gold miners who founded GLD have for choosing the bullion-bank shorts as “custodians” for their gold? Is it because these banks represented the safest storage option for GLD unit-holders? Hardly. These same bankers have a long history of bullion fraud. The most recent example of this was when Morgan Stanley recently paid millions in damages for simply pretending to buy bullion – on behalf of its own clients (see “Morgan Stanley pays damages for Precious Metals Fraud”).
Is Mr. Hamilton really naïve enough to believe that bankers who would cheat their own clients would not do the same to small, gold and silver investors – who are not their own clients? The whole reason these bankers (mostly U.S. bankers) are caught in one fraud-scheme after another is that they know they never have to worry about criminal prosecution for their misdeeds and the fines levied against them are always less than the profits they make on those schemes.
Thus, since GLD did not choose to use the bullion-banks as custodians for safety, then unless they offered to buy and store GLD's “bullion” far cheaper than anyone else, what other reason could GLD have for using the bullion-banks? The only other suggestion I can come up with is that the gold miners who founded GLD have had such a long and cosy relationship with these bullion-banks that they simply never considered any other arrangement.
Whether the bullion-banks are being used because they offered subsidized rates for storage, or because they are such good friends with the miners involved, Mr. Hamilton's assurances about the founders of GLD do nothing to address my own concerns.
One relevant issue that Mr. Hamilton does raise is the issue of audits. He proclaims himself to be an accountant, notes that GLD is “audited” - and considers the case closed. In fact, I had another accountant take exactly this stance in criticizing my position on bullion ETFs. I point out to Mr. Hamilton the same thing I pointed out to this other accountant: the bullion-banks have two, enormous gold (and silver) obligations – the massive custodian agreements and the equally massive, in-house short positions.
Only half of these holdings are ever audited: the GLD holdings, while the only backing these bullion-banks have ever demonstrated for their short positions is the tiny portion of that amount they have to post as collateral for their position. The two holdings have never been simultaneously audited. Half an audit is obviously no better than no audit at all.
All that has ever been established is that the bullion banks have enough bullion to cover either their short positions or the custodian agreements. If these bankers had to choose between defaulting on their own short positions – which would permanently discredit them in commodity markets, or defaulting on their custodian agreements (and pay a small fine), which course of action would these bankers be most likely to take?
This brings me to what is clearly the most bizarre part of Mr. Hamilton's defense of GLD. Among my most powerful arguments against the bullion ETFs is that they perfectly serve the interests of the bullion-banks. These funds have soaked up tens of billions of investor dollars in the precious metals sector. Had these funds never existed, while some of that money may never have entered the sector, obviously most of it would have been used to buy real bullion, or have been invested in the commodity-producers – the miners.
I remind readers that these same bankers who were leveraging their own paper by 30:1 would certainly never hesitate to leverage their bullion a mere 2:1. If the bullion-banks were merely pretending to hold bullion for these funds, then instantly these “bullion ETFs” become the bankers' biggest weapon in suppressing the prices of gold and silver, through diluting the money entering this sector nearly by half.
This entire argument completely escapes Adam Hamilton, indeed, he actually attempts to argue the exact opposite point. He strongly asserts that if GLD was found to be all “paper” or simply mostly paper that this would be damaging to the positions of “longs” who were holding real bullion.
I find this argument completely unfathomable and without merit. GLD is now (supposedly) one of the largest holdings of gold on the planet. If this supposed stockpile of gold was found to be non-existent, then the value of the real bullion held by investors does not go down, it goes up. This is simple supply/demand dynamics.
If GLD is fraudulent, then this immediately means that gold stockpiles (i.e. “supply”) are much smaller than believed. This shifts the demand curve to the left, meaning higher gold prices at every level of demand. While Mr. Hamilton is an accountant, he is clearly not an economist.
I began reading his article anxious to see if I had overlooked anything in my own analysis of this issue, and fully prepared to amend my views if a genuine gold-bug like Adam Hamilton had come up with any factors I had not previously considered.
Instead, I remain more convinced than ever of the illegitimate nature of most bullion ETFs (as I always acknowledge, there are smaller funds which do buy and hold their own bullion). While Mr. Hamilton only briefly mentioned silver, I cannot engage in a discussion of the legitimacy of bullion ETFs without reminding readers of a previous discovery: that all the silver “held” by SLV (and others) is for sale – as part of official inventories.
Obviously, the founders of SLV (and the bullion-banks lurking in the shadows) cannot claim to be “holding” over 400 million ounces of silver for their unit-holders, while slapping a “for sale” sticker on every bar – meaning that anyone with enough money could buy every ounce of silver “held” by SLV today (see “Your ETF-Silver is For Sale”). Some “custodian agreement”!
For investors who want a position in precious metals, buy real gold or silver, or buy into a safe bullion ETF. Do not buy GLD or SLV unless you trust bankers. And do not rely upon Adam Hamilton for reassurances in this regard. For whatever reason, he has demonstrated an enormous “blind spot” on this issue.
There are many legitimate reasons to doubt the validity of large, bullion ETFs – and as of today none of those concerns have yet to be addressed.
Disclosure: I hold no position in GLD, SLV, or Morgan Stanley (MS).