Clavis

Is the GLD ETF Really Worth Its Metal?

seekingalpha.com/artic...


The GLD prospectus is a steaming pile of legal loopholes. Only a lazy mutual fund manager or a brain-dead pension fund manager would touch this turkey.

It's also likely that retail investors, and their highly compensated advisors, are not even remotely aware of the astounding risks declared in the ignored GLD trust documents.

There are other GLD critics,
besides the Financial Foghorn here, who think that the gold ETF is untrustworthy.
Dave Kranzler, from whom much of this dissertation has been respectfully purloined, has obviously analyzed the prospectus carefully and found it wanting.

James Turk, a former money manager for the Saudi Arabian Central Bank, long time precious metals market analyst, and the founder of goldMoney.com, has been critical of GLD since it was proposed in 2004. And he recently noted that the August, 2008 GLD updated prospectus, on page 3, says: "Proceeds received by the Trust from the issuance and sale of Baskets consist of gold deposits and, possibly from time to time, cash."

A "gold deposit" is a word that has a precise meaning in the law, and is the exact opposite of "bailment".

A bailment is what happens when you give your car to valet parking. When you present the ticket, you get your very own car back.

With a "deposit," a bank gives you a certificate of deposit, a checking account statement, a savings book or some other evidence of its debt to you.
You are no longer entitled to get your very own dollars back, but have become a depositor and general creditor of the bank. Title/ownership has transferred from you to the bank, and the bank can do whatever it wants with your former dollars.

It is extremely unlikely that a highly paid passel of lawyers that worked over the GLD prospectus would offhandedly put in a word like "deposit" unless there was a good avoidance-of-liability reason to do so.
If physical gold were actually in the ETF, the above statement would have read: "Proceeds received by the Trust from the issuance and sale of share baskets consist of gold (or gold bailments) and, possibly from time to time, cash."

Turk's point, and Kranzler's reference, is that "gold" is one thing and a "gold deposit" is something entirely different. "Gold" is physical metal stored/bailed in a secure vault.

A "gold deposit" is a liability of a financial institution, and it's just another lousy paper gold IOU.