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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.
  • 11 Reasons To Be Suspicious Of The SPDR Gold Trust And Why I Prefer The Central Gold Trust 6 comments
    Apr 22, 2013 3:54 PM | about stocks: GLD, GTU

    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.

    Stocks: GLD, GTU
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Comments (6)
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  • Philippe97
    , contributor
    Comments (23) | Send Message
    As most non-pros would buy one of the trusts for security/hedge/diversi... reasons, I surely would advice them to buy GTU
    22 Apr 2013, 04:19 PM Reply Like
  • WS_Broker
    , contributor
    Comments (138) | Send Message
    Can't believe SA would be so biased to deny you publication because you don't blindly pump GLD like everyone else.
    23 Apr 2013, 11:30 AM Reply Like
  • Ben Kramer-Miller
    , contributor
    Comments (1454) | Send Message
    Author’s reply » GLD is advertised on SA.


    SA has a right to publish what they want to. They still give me the right to post anything I want on an unpaid blog. I took advantage by getting people to read the article which is more visible and then leading them to my instablog. Its difficult to get unconventional views on finance out there through mediums such as SA which reach so many people.


    So far my approach is working. I can't count the number of viewers to my blogs the way I can with my articles, but there have been a decent number of comments here so I know I am reaching somebody.
    24 Apr 2013, 01:47 AM Reply Like
  • l.stanley
    , contributor
    Comments (54) | Send Message
    Your first article was more balanced and truly useful to us neophytes. This article is more conspiratorially flavoured. Ordinarily I would dismiss it. However just last week there was a program on the CBC called Doc Zone. The episode was entitled something like, “The Bullion Banks and the Missing Gold”.
    Here are a few points that stuck in mind afterwards:


    One guy was convinced that the silver mkt was rigged. He went to the Commodity Trade commission and sat with one guy and predicted each significant move in silver before it happened. [ His cues were the dummy bids & asks that occur before the trade.]


    Bullion banks – MS and HSBC :
    They leased British bullion and then they melted it down and sold it for jewellery.
    So now that gold exists as jewellery as well as the gold on the books for the British gov’t – twice as much as before !!


    The Germans wanted to repatriate their gold from the NY vaults. They were not allowed to see it. They will get it over a period of years. Why ? Because it is gone and must be replaced ??


    Note that when Hugo Chavez wanted Venezuela’s 11 m oz of gold back, all hell broke loose. He eventually got it but it took time, and extraordinary efforts.


    An inventory has not been done on the gold in Fort Knox for a couple decades; and they refuse to do one, even though it is not a difficult procedure.
    24 Apr 2013, 01:21 AM Reply Like
  • Ben Kramer-Miller
    , contributor
    Comments (1454) | Send Message
    Author’s reply » I never meant this to be "conspiratorial" although I have nothing against conspiracy theories: a lot of them turn out to be true. For a lot of these reasons to avoid GLD my point is that these conspiracy theories are out there, and even if you don't believe them, you shouldn't categorically dismiss them. Even if there is only a 1% chance that they are true why expose yourself to that risk unnecessarily when there are other options such as GTU.


    I think a couple of the more seemingly conspiratorial points that I make are simply common sense. For example, the manager of the GLD doesn't own GLD. Why would you want to invest with somebody who doesn't have his or her money at stake along side you.


    You should take a look at my instablog on silver manipulation



    SA rejected this as well.


    In it I argue that the silver manipulation thesis is circumstantial, but that the circumstantial evidence is too strong to ignore.
    24 Apr 2013, 01:42 AM Reply Like
  • ETFNinja
    , contributor
    Comments (9) | Send Message
    Some of your arguments are legitimate, other clearly aren't, which is why I imagine SA rejected this first version.


    Argument #5: Their objective is to reflect the performance for the ETF SHARES (like every other ETF in existence) because they cannot make guarantees for the market prices. GTU says it can simply hold and store because there are no redemptions. The main reason you will see deviations is because the NAV is on the London fixing, which closes at 3pm EST and GLD continues trading for another hour.


    Argument #6: Wow, this one is sound logic.


    Argument #7: Even you know this is an incorrect argument given the regulations for allocated vs. unallocated accounts.


    Argument #8: comparing Jason T. to a CEO of Coca Cola makes no sense. The CEO of Coca Cola has a direct impact on the success of the company, which is why it is important for him to put his skin in the game. Jason T. does not have an impact on the value of gold, so why does it matter what he chooses to use.


    Argument #9: really starting to reach here. Einhorn stated the primary reason for selling was because he could get cheaper storage costs than what GLD was paying. Paulson still has a boat load of exposure, but I guess that doesn't support your theory so let's just ignore it.


    Argument #10: It was proven, and CNBC later disclosed, that Bob wasn't in GLD's section of the HSBC vault.


    Argument #11 discredits your ability to compare an ETF to a CEF since you do not understand the difference in the structure of a CEF and an ETF.


    I really don't know why you are so surprised that SA blocked this version. Better luck next time.
    10 May 2013, 01:02 PM Reply Like
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