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Ben Kramer-Miller
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I am an independent investor. I write in order to clarify my own ideas in order to refine my investment strategies. My investment philosophy is guided by two major themes: long term secular trends and deep value.
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  • 11 Reasons To Be Suspicious Of The SPDR Gold Trust And Why I Prefer The Central Gold Trust

    In this article I give 11 reasons that I am suspicious of the integrity of the SPDR Gold Trust: GLD. Specifically what I mean by this is that one of the following is true: (1) GLD may not hold all or some of the gold that it should, or (2) the former statement may hold true in the future.

    I want to make it clear that there is no conclusive evidence of fraud or malfeasance. I just think that there might be fraud or malfeasance.

    That being said, investors who are interested in owning a publicly traded instrument that holds gold should consider the Central Gold Trust (NYSEMKT:GTU). As I give my reasons for being suspicious of GLD's integrity I will mention GTU wherever it offers a definitive advantage over GLD. According GTU's 2012 annual report the fund has an expense ratio of 0.34% (compared with GLD's 0.4%) and it held 98.6% of its assets in gold bullion and gold bullion certificates, with less than 1% of its assets in the latter, as of the end of 2012 (GLD is a "pure" gold play).

    1: GLD shareholders have no voting rights except if 2/3 of the shareholders decide to remove the Trustee (The Bank of New York Mellon) (GLD prospectus, p.4). Consequently GLD shareholders lack the right to decide where the gold is held, how it is held, and who audits the fund.

    GTU shareholders have voting rights and can choose board members (2012 GTU annual report, p. 1, 2).

    2: GLD's gold may be held with subcustodians, which are chosen by the custodian (NYSE:HSBC). Subcustodians may employ additional subcustodians to hold GLD's gold. The trustee has no say in this. If gold that is held by a subcustodian is lost GLD shareholders have limited legal recourse (GLD prospectus, p. 11). Basically, if (1) the custodian gives some of GLD's gold to a subcustodian to hold, (2) this subcustodian loses or steals some or all of this gold, and (3) the custodian can prove in court that (1) was a reasonable action (i.e., they had reason to believe in the competence and integrity of the subcustodian), then the custodian is not responsible for GLD shareholders' losses.

    GTU has only a custodian (the Canadian Imperial Bank of Commerce). The custodian cannot release any of GTU's gold without permission from the Board of Trustees (2012 GTU annual report, p. 1)

    3: The GLD trustee is limited in the number of visits (2) it makes to the custodian to inspect its gold holdings. Subcustodians can refuse to reveal information to the trustee regarding GLD's gold (GLD's 2012 10-K, p. 15).

    4: GLD's gold is allocated, but not segregated. That is to say, the gold can be accounted for (see the GLD gold bar list) but it is not necessarily set aside in isolation by the custodian at a definitive location.

    GTU's gold is segregated, and there is a definitive statement as to its location (the underground treasury vaults of the Canadian Imperial Bank of Commerce) (2012 GTU annual report, p. 1).

    5: "The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion, less the expenses of the Trust's operations" (GLD prospectus, p.2, my italics). Imagine that there is a fund created that reflects the price performance of Exxon Mobil that says that its goal is to reflect the price performance of Exxon Mobil shares. This does not imply that the fund actually holds Exxon Mobil shares.

    "[GTU's] purpose is to acquire, hold and secure gold bullion on behalf of its Unitholders" (2012 GTU annual report p. 1, my italics). Assuming that GTU holds gold bullion, its shares should reflect the price of gold bullion.

    6: I mentioned that GLD holds allocated gold and publishes a daily list of the individual bars it holds with serial numbers. This should reassure investors that GLD holds the quantity of gold it claims to. Yet James Turk reported in an article that in 2004 Stephen Marney of the Gold Anti-Trust Action Committee (GATA) claims to have found that 156 bars' serial numbers were doubles (the fund held just under 7,000 bars at the time). If this information was available to anybody with a computer and a little bit of time who knows what information was unavailable! Currently GLD holds just under 100,000 bars. I have no plans to go through the list, but the presence of the initial discrepancy and GLD's trustee's silence on the matter is reason enough to question the integrity of GLD. Even if the trustee had stated that it was a typo or something similar I would not want to invest my money with an institution that is so imprecise in its bookkeeping.

    7: The custodian of GLD is HSBC, USA, the parent company of which is HSBC. According to an article by Adrian Douglas of GATA, HSBC held one of the largest short positions in gold in 2009. HSBC claimed that this position was to offset long gold holdings. One can only speculate as to the nature of these long gold holdings and the real reason for the large short position. Many people and institutions, including GATA, maintain that HSBC is involved in a massive conspiracy to suppress the price of gold. In a 2010 interview Andrew Maguire told the New York Post that "HSBC conducts an ongoing manipulative concentrated naked short position in gold." If Maguire is correct that HSBC has a naked short position in gold, then HSBC's claim that it has long gold holdings that need to be hedged with short positions is not true; and if HSBC has to make gold deliveries as a result of its short position then GLD gold holdings are by far the most obvious source of gold for them. Even if the gold suppression conspiracy theory is false, it is not a good sign that HSBC is betting against GLD shareholders, who are its indirect clients.

    8: Jason Toussaint, the managing director of GLD, implies in aninterview with BNN that he doesn't hold any GLD shares, stating: "I have some physical [gold] and I also own some gold mining shares." Having just defended the legitimacy of GLD the statement "I own GLD shares" is conspicuously absent. Why does he hold other forms of gold but not GLD? This is analogous to the CEO of Coca Cola making publicly bullish statements about the company when he doesn't hold any Coca Cola shares, and then stating that he owns PepsiCo shares to get exposure to the soft drink industry.

    9: In 2009 it was reported that respected hedge fund manager David Einhorn sold his GLD shares and bought physical gold with the proceeds.

    10: In 2011 Bob Pisani, a reporter for CNBC, allegedly visited a vault where GLD's gold was allegedly held. He held up a bar to the camera, but as reported the serial number on this particular bar was not found on the list of GLD's holdings.

    11: During the financial panic of 2008-9 shares of GTU traded at upwards of a 30% premium to the spot price of gold.

    (click to enlarge)

    GLD traded with the spot price of gold. Thus the market was willing to pay a premium for GTU during a distressful period when investors were more likely to want what they perceive to be real physical gold. If investors believed that GLD had the physical gold that it claimed to during the financial panic then it should have traded at a premium to spot gold as well. Because GLD traded with the futures market, GLD shares are worth the same as claims on gold delivery in the future. This does not bode well for the thesis that GLD holds physical gold.


    I must stress again that none of the information that I provide is evidence that GLD does not hold all of the gold that it should. But the information I provide is in some cases suggestive of subterfuge on the part of GLD's managers, and in other cases it is indicative that others perceive subterfuge on the part of GLD's managers. Consequently, with GTU currently trading in line with its NAV there is absolutely no reason for investors to hold GLD shares.

    Disclosure: I am long GTU.

    Tags: GLD, GTU, Gold
    Apr 22 3:54 PM | Link | 6 Comments
  • Money, Inflation, And The CPI

    Note: I wrote this instablog in response to several comments made in response to my article Investment Strategy for an Inflationary Environment. I got the impression that some readers did not fully understand the nature of money or the difference between inflation and rising prices. There were also several comments questioning my use of John Williams' calculation of the CPI over the Bureau of Labor Statistics' calculation. I hope this will be helpful to readers of that article.


    Dollar devaluation has been a fact of life for Americans for decades.

    A quick glance at prices over the years gives this fact a concrete reality that cannot be denied. Here are a few examples. Up until 1948 it cost a nickel to ride the subway in New York City; now it costs $2.50, an astonishing 50-fold increase. In the same year a movie ticket cost just $0.36; now the average movie ticket costs nearly $8. In the 1920s a car would set you back $1,500 whereas now the average car costs $25,000-$30,000. The most expensive ticket to the first Super Bowl cost just $12 in 1967; now it is 100 times higher at $1,200.

    The price jumps vary from item to item; and while we can concoct excuses for specific situations, the fact remains that prices for everything have skyrocketed over the years. Furthermore, when we look at the prices of these items in terms of one other, we see much smaller price changes. A 200%+ increase in the price of a subway ride relative to a movie ticket is not insignificant, but it is virtually nothing compared to the 5000% increase it had in U.S. Dollars.

    The most obvious conclusion to be drawn from these observations is that dollars are becoming less valuable.

    In this article I discuss dollar devaluation as an economic phenomenon and reveal my strategy for investing in an inflationary environment. In part 1 I summarize the Austrian analysis of currency devaluation and explain rising prices as the result of the Federal Reserve's expansionary monetary policy. In part 2 I illustrate the ongoing currency devaluation using data that I hope will resonate with the "typical" American consumer. I also expose the misleading nature of the CPI. Finally in part 3 I discuss ways investors can protect and grow their assets in an inflationary environment.

    1--Inflation vs. Rising Prices

    If you look up the word "inflation" in the dictionary the definition will usually say that inflation is the phenomenon of rising prices. However in Austrian Economics inflation is not identical to rising prices. In hisTheory of Money and Credit, Mises writes:

    In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.

    Von Mises, Ludwig. The Theory of Money and Credit;. New Haven: Yale UP, 1953, p. 239.

    Inflation is an increase in the supply of money. Prices rise as a consequence of a larger money supply because each monetary unit becomes less valuable. The importance of this distinction lies in the observation that prices can rise for many reasons (a supply shortage, increased demand, decreased demand in the monetary unit...etc.) and referring to all of these as "inflation" is unsystematic and theoretically untenable. In this section I intend to clarify the distinction between the inflationary process and the phenomenon of rising prices.

    A--Inflation and Quantitative Easing

    Inflation is a result of the a combination of two processes: quantitative easing and fractional reserve banking. It is crucial to understand that inflation is not the same thing as "quantitative easing," yet the former is related to the latter.

    Quantitative easing, or "money printing," refers to the Federal Reserve increasing the monetary base (aka MB). The Federal Reserve purchases bonds from banks using money it creates "out of thin air" for this purpose. This is basically an accounting trick. The money the Federal Reserve creates is a liability on its balance sheet; the bonds are assets. This process is not unlike a corporation that issues debt: the corporation does not alter its net equity, although it does alter both its assets and liabilities.

    This newly created money then replaces bonds on banks' balance sheets. Banks can then lend this money out. After the money is lent out to buy houses or factory equipment or anything else most of it ends up as bank deposits. The banks then turn around and lend some of this money out again. In this way the money supply grows beyond that of the monetary base.

    The following example illustrates this process.

    Suppose a bank sells a bond to the Federal Reserve for $1,000. The money supply increases by $1,000. The bank then lends this $1,000 to Jane so that she can buy a house. Jane takes this $1,000 and gives it to John, who signs over the deed to his house. John takes that $1,000 and puts it in the bank.

    Suppose this happens 1,000 times. The Federal Reserve has created $1,000,000, and so the monetary base has increased by $1,000,000. Furthermore, 1,000 depositors ("Johns") each have $1,000 at the bank on deposit. Thus far the money supply has increased by $1,000,000, or by the same amount as the monetary base.

    The bank then makes a bet that at any given time only a certain percentage of these 1,000 people will want their money back at any given time. Say this is 10%. The bank, having $1,000,000 in deposits can then take 100%-10% = 90% of this money and lend it out. They lend out $1,000 each to 900 Janes to buy houses from 900 Johns, who then deposit a total of $900,000 into the bank. Because each of the original 1,000 Johns believe that they have $1,000 each with the bank, and now 900 additional Johns believe that they have $1,000 each with the bank, the money supply has increased by $1,900,000 even though the monetary base has only increased by $1,000,000. When the process is repeated the next time around the money supply increases by $810,000 (90% of $900,000) to a total of $2,710,000, and so on. The process can be repeated indefinitely.

    This process is called fractional reserve banking.

    Thus we see how quantitative easing potentially, but not necessarily, leads to an increase in the money supply. The money supply increases as a combination of: (1) the Federal Reserve increasing the monetary base, and (2) banks increasing the total amount of credit by "pyramiding" this credit on top of the monetary base. The larger the monetary base, and the smaller the percentage of money that banks keep as reserves to meet depositors' demands, the larger the money supply.

    B--Rising Prices

    As I have mentioned, the word "inflation" is often used to refer to rising prices. For brevity's sake I will refer to rising prices as "inflation2" where the word "inflation" is used colloquially to refer to generally rising prices.

    The fundamental difference between the two is as follows: the rate of inflation2 depends on both the supply and demand of money, while the rate of inflation is the rate of change in the money supply regardless of the demand for money.

    Thus if for whatever reason people demand money then the rate of inflation2 will be lower than the rate of inflation. For example Germany went off the gold standard in 1914, although German citizens believed that this was only a temporary measure due to World War 1, and so the increase in the money supply outpaced price increases. Similarly, if the demand for money declines then inflation2will outpace inflation. Continuing the German example, after World War 1 the purchasing power of the German Mark declined more rapidly than the money supply increased because demand for money declined.

    2--How Fast are Prices Rising?

    The rate of inflation2 cannot be given in a single number. The prices of different items rise at different rates at different times. Additionally, each individual or family experiences inflation2differently because they each purchase different baskets of goods. Nevertheless investors need to have a general idea of how quickly prices are rising in order to prepare for future expenditures.

    The U.S. Government's Consumer Price Index (NYSEARCA:CPI) provides a rate of inflation2 for a basket of goods that a typical individual or family might purchase. Here is a chart of the CPI going back to 1984:

    (click to enlarge)

    The CPI has increased from 100 in 1984 to roughly 226 presently, which is about a 2.84% increase per year. Looking more specifically at the 21st century the index rose from about 167 (rough average for the year 2000) to 226, or a 2.3% increase per year. The conclusion drawn from this is that a basket of goods that a typical family or individual purchases has increased in price by 2.3% per year.

    Intuitively this number seems to be too low. What follows are a few examples of price changes over the past several years of things people buy. It is meant to provide readers with a general idea of what price inflation2 has really been in recent times.


    With the bursting of the housing bubble home prices have inflated only mildly in the 21st century. The Case Shiller home price index compiles data from 20 American cities.

    The Case Shiller index was at approximately 100 in 2000, and it is currently at roughly 145, which equates to an annual increase of 2.9%.


    Gasoline futures (wholesale prices) in 2000 were around $0.75 per gallon, and they currently trade at about $3.15 per gallon, which is an annualized increase of roughly 11.7%.

    (click to enlarge)

    Retail prices have faired better. In 2000 prices were about $1.25

    (click to enlarge)

    According to AAA current prices are $3.74. This comes out to an 8.8% increase.

    Electricity prices roughly doubled from 2000-2011, which is approximately a 6% increase per year.

    (click to enlarge)


    Food prices obviously vary tremendously, so I will give several data points. According to the FAO food price index, which went from 90 in 2000 to 210 in 2013, the average rate of increase has been roughly 6.7%

    (click to enlarge)

    For some more specific data consider some example provided A 2 liter bottle of Coca Cola cost $0.99 according to the Daily Record in 2002, and $1.99 at Foodtown in 2013, which is an annual increase of 6.5%.

    In 2000 an 18 ounce box of Kellogg's Corn Flakes cost $2.99, or $0.16 per ounce. In 2013 a 12 ounce box of Kellogg's Corn Flakes cost $3.79, or $0.32 per ounce, which is a 5.5% annualized increase.

    In 2003 a 1.55 ounce Hershey bar cost $0.80. In 2011 it cost $0.99, although the prices are from different stores. The annual rate of increase is 2.7%.

    In 2004 a 1 pound box of Nabisco Oreos cost $2.99, or $0.19 per ounce. In 2013 a 14.3 ounce box cost $4.59 or $0.32 per ounce, an annualized increase of 6% per year.


    In 2000 people who paid into employee sponsored health insurance programs paid $1,619 to insure their families; in 2010 the price was $3,997, which is a 9.5% increase. For individual coverage the price went from $334 to $899 during the same period, which is an annualized increase of 10.4%

    (click to enlarge)

    NYC Subway Ride

    In 2000 a NYC subway ride cost $1.50; now it costs $2.50, which is a 4% annualized increase.

    Super Bowl Ticket Prices

    In 2000 the most expensive Super Bowl tickets cost about $280; now they cost $1,200, which is a 12% annualized increase.

    (click to enlarge)

    Movie Ticket Prices

    In 2000 the average movie ticket cost $5.39; in 2011 the price was $7.93, which is a 3.6% annualized increase.

    Again I must stress that this data only provides a partial picture of how prices have been rising during the 21st century. Nevertheless I can confidently conclude that most Americans have seen their living costs rise faster than the CPI suggests.

    2A--Deconstructing the CPI

    Why the Government Understates Inflation2

    The government has three primary incentives to understate inflation. First, if people believe that the CPI is accurate they will be more likely to hold dollars, and this consequently benefits the demand side of the supply-demand equation for dollars.

    Second, the government has expenditures that are directly correlated with the CPI. Government benefits such as Social Security are designed to increase with inflation2, and cost of living adjustments are determined by the CPI. If the CPI understates the rate at which prices are rising then COLAs are smaller than they should be, which saves the government money. Also, the government issues inflation protected treasury bonds, or TIPs, that link payouts to bond-holders to the CPI. If the CPI understates inflation then TIP payouts are lower which saves the government money.

    Third, GDP data is corrected for inflation2 as determined by the CPI. If the CPI understates inflation2 then the GDP appears to be larger and growing faster (or shrinking more slowly) than it really is. This in turn makes the government's economic policies appear to be more favorable than they really are, and the public will show greater support for spendthrift politicians.

    How the BLS Manipulates the Data

    The Bureau of Labor Statistics employs two tactics in order to understate the CPI. First, it incorporates what are known as hedonic adjustments into the CPI. Let's say that a car costs $30,000 in 2010 and $33,000 in 2011. This should be represented as a 10% increase. But the BLS might claim that $1,500 of this $3,000 increase is due to improvements in the product, and so the price increase is only considered to be 5%. There are two issues with this line of thought. First, hedonic adjustments are subjective as they can be calculated as the BLS chooses. Second, hedonically adjusted prices do not reflect consumer experiences, because products are only available with the improvements that justify hedonic adjustments.

    Second, the BLS uses what is called substitution bias. The idea here is that prices of certain items rise faster than others, and consequently consumers will switch from those items whose prices are rising more quickly to those items whose prices are rising more slowly. This might be the case for some products. For example, if the price of chocolate ice cream rises faster than the price of vanilla ice cream then one might be able to justify weighting the latter more in the CPI than the former. But this reasoning does not apply to essential items. Suppose that we lived in a world where there are only two products--clothing and food--and each product is 50% of the CPI. According to substitution bias if the price of clothing rises and the price of food remains the same, then people would spend more money on food than they did before the price increase. But if there is an individual who could barely afford these items before the price change what the BLS is essentially saying is that this individual will forego clothing himself and eat more than he needs to. Yet it is natural to assume that this individual will attempt to find a way to cut down on his food consumption so that he can clothe himself.

    John Williams of ShadowStats provides data that eschews these statistical games by calculating the CPI using the methodology employed by the BLS before these adjustments were incorporated.

    (click to enlarge)

    If John Williams is correct then the 21st century has seen inflation2that averages in the high single digits, which reflects fairly accurately the figures in the above examples.

    Mar 19 3:50 AM | Link | Comment!
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