The ’sweat of the sun’ and ‘tears of the moon’ are singularly unique commodities. They function as unencumbered equity and function as a presentation currency. For this singular reason they are largely hoarded, not consumed, and serve to protect against despotic government inroads by preventing confiscation through inflation which is a form of taxation without representation.
The ETFs GLD and SLV are commonly represented as being bullion. Accepting this assertion is naive and with potential financially lethal consequences. While GLD and SLV track the relative prices that is where the similarities with bullion end.
On May 20, 1999, Alan Greenspan testified before Congress, “Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”
The ETFs GLD and SLV are not this ultimate form of currency. I will raise only a few essential issues, although there are many.
QUALITY OF GOLD
Gold is a physical substance with a specific definition and is listed as element 79 in the periodic table. Gold is not subject to any risks and serves with complete fidelity only its master. Drafted by securities attorneys usually earning $500+/hour, the GLD prospectus, which is similar to SLV’s prospectus, states, “Investing in the Shares involves significant risks. See “Risk Factors” starting on page 6.” Page 11 states, “Neither the Trustee nor the Custodian independently confirms the fineness of the gold allocated to the Trust in connection with the creation of a Basket [issuances].” Page 12: “In issuing Baskets, the Trustee relies on certain information received from the Custodian which is subject to confirmation after the Trustee has relied on the information. If such information turns out to be incorrect, Baskets may be issued in exchange for an amount of gold which is more or less than the amount of gold which is required to be deposited with the Trust.” There is no assurance that the ‘gold’ held in the ETFs is actually the same gold as defined under the periodic table.
On page 11: “In addition, the ability of the Trustee to monitor the performance of the Custodian may be limited because under the Custody Agreement the Trustee has only limited rights to visit the premises of the Custodian for the purpose of examining the Trust’s gold”. Therefore, it appears that an audit of the actual physical gold is precluded. In other words, ‘Just trust us, the gold is there.’
The reassertion of counter-party risk is driving much of the risk in the current markets. Page 10 states, “If the Trust’s gold is lost, damaged, stolen or destroyed under circumstances rendering a party liable to the Trust, the responsible party may not have the financial resources sufficient to satisfy the Trust’s claim.” On page 9, “The Trust does not insure its gold.” Further on page 12, “Gold held in the Trust’s unallocated gold account and any Authorized Participant’s unallocated gold account will not be segregated from the Custodian’s assets. If the Custodian becomes insolvent, its assets may not be adequate to satisfy a claim by the Trust or any Authorized Participant. In addition, in the event of the Custodian’s insolvency, there may be a delay and costs incurred in identifying the bullion held in the Trust’s allocated gold account.” Gold is not subject to counter-party risk or in other words the financial ability of a counter-party to pay. Clearly, GLD is impregnated with counter-party risk that may instantly and violently appear from within like the Alien.
CONFLICT OF INTEREST
There is economic incentive for the Custodians to loot the ETFs. From page 9, “Under the Custody Agreements, the Custodian is only liable for losses that are the direct result of its own negligence, fraud or willful default in the performance of its duties. Any such liability is further limited, in the case of the Allocated Bullion Account Agreement, to the market value of the gold held in the Trust’s allocated gold account with the Custodian, or the Trust Allocated Account, at the time such negligence, fraud or willful default is discovered by the Custodian”. Not only does the Custodian attempt to disrobe itself of liability, but even if it is found liable it tries to assert damages accounted at the time of discovery of the default. The probability of such damages being woefully understated relative to the potential future market value in the event of such a default is extremely high. In effect, this provision gives the Custodian a perpetual call option on the GLD hoard.
Who are these parties that say, ‘Just trust us, the gold is there’? Page 36 lists some Authorized Participants including such venerable, safe and secure Wall Street behemoths as Bear Stearns & Co. Inc., Lehman Brothers Inc., Citigroup (NYSE:C) Global Markets Inc., Merrill Lynch (MER), Goldman Sachs (NYSE:GS), J.P. Morgan Securities (NYSE:JPM), UBS Securities (NYSE:UBS) and Morgan Stanley & Co. (NYSE:MS). Given the past actions of these firms, I am not sure I would want them anywhere near my gold.
For example, in June 2007 Morgan Stanley & Co. settled a class action lawsuit for $4.4 million where the complaint alleged ‘that Morgan Stanley told clients it was selling them precious metals that they would own in full and that the company would store. But Morgan Stanley either made no investment specifically on behalf of those clients, or it made entirely different investments of lesser value and security.’ While the efficacy of the claim may still be at issue the Better Business Bureau-like complaint from unsatisfied customers who initiated litigation does not inspire confidence for those seeking to reduce risk.
During a credit contraction and liquidity crisis the ‘relationship goes out the window’. On December 12, 2008 UBS ‘UBS AG announced today it has frozen one of its real estate funds until the end of next year, due to an inability to keep up with redemption requests from wealth management clients.’ Why? The spokeswoman said, ‘We closed the fund temporarily for the protection of the investor’. It would be most unfortunate to have one’s gold in the sticky fingers of such fine and upstanding firms that refuse to deliver to protect you.
Additionally, the GLD and SLV hoards may pose a convenient source of bullion for the United States government to steal. Given prior tyrannical history with FDR’s Executive Order 6102 this may be a material threat. On the other hand, Section 19 of the 1792 Coinage Act stated that those who ‘debased or made worse as to the proportion of fine gold or fine silver therein contained … shall suffer death’. Perhaps the Americans were more civilized than their French counterparts and preferred the appearance of due process of law when executing their bankers and politicians for destroying their economies with fiat currency and fractional reserve banking.
ACCOMPLICES TO CENTRAL BANK GOLD PRICE SUPPRESSION SCHEME
During the 1990’s Mr. Rubin had devised the gold leasing scheme with the intent being elucidated by Dr. Greenspan’s testimony in 1998, “Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.” Many of the previously mentioned firms are alleged by GATA to be complicit players in the central bank gold price suppression scheme. Mr. Robert Landis, a graduate of Princeton University, Harvard Law School and member of the New York Bar, has asserted that “Any rational person who continues to dispute the existence of the rig after exposure to the evidence is either in denial or is complicit.” Is it possible that GLD and SLV hoards are being surreptitiously used to continue the gold price suppression scheme?
For those desiring to trade paper gold, the GLD and SLV vehicles may satisfy those requirements. But for those who desire the ’sweat of the sun’ or ‘tears of the moon’ in order to own the ultimate form of payment and therefore hearken to Chicken Little’s warnings and protect their assets then the GLD and SLV vehicles appear extremely deficient. Alternative forms of holding allocated gold bullion exist that are affordable, secure, convenient, trustworthy and not subject to counter-party risk.
For these reasons including (1) the quality of the gold is at issue, (2) no audit of the physical metal is permitted, (3) counter-party risk impregnates the investment vehicle and (4) there are strong conflicts of interest with complicit players in the central bank gold price suppression scheme; GLD and SLV appear impotent in reducing inflation or counter-party risk.
Disclosures: Long physical gold. No position in GLD or SLV.