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Own Physical Gold? - Read This

The following is the text of an e-mail I sent yesterday to Subscribers of is a research website that provides coverage on the approximate 1,600 Mining and Oil & Gas stocks listed on the Toronto and Toronto Venture Stock Exchanges.

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I came across an article this morning titled ‘Panic in Gold Market? Looming Shortage and Massive Short Squeeze?’ when selecting articles for StockResearchPortal’s ‘Today’s Filtered News’ feature. The article says:

· We are hearing of more and more cases of gold investors wanting to take physical delivery or have allocated gold;

· A couple of months ago Greenlight Capital, the large hedge fund, switched $500 million of investment in GLD to physical gold bullion;

· Apparently Germany has requested that its sovereign gold held by the NY Federal Reserve Bank be returned to Germany”, and “Hong Kong has requested the same of the Bank of England that stores its sovereign gold;

· Robert Fisk, a respected journalist for the UK’s Independent newspaper, reported this week that the Arab oil producing states, Japan, Russia and China have been holding secret talks to replace the dollar as the international reserve currency and as an accounting unit for trade - and that the basket of currencies they propose instead of the dollar would include gold!

· Rob Kirby’s (of KirbyAnalytics and GATA consultant) sources have told him that there was panic in the London gold market around September 30th, 2009 as participants in the market wanted to take delivery of their purchased gold and refused generous cash settlements that were offered instead - and that Central Banks had to come to the rescue to provide the gold via leasing;

· The gold market is in a precarious position. Just like in the days of the gold standard it only required one customer not having his deposit returned to bring down the bank because a domino effect is initiated that results in all depositors asking for their deposits to be returned. If my estimates are correct that somewhere between 64,000 and 150,000 tonnes of gold have been sold against a reserve of only 15,000t; and,

· If you “think” you own gold you should take a few more steps to make sure that you do actually own gold. If you have unallocated gold in some sort of pool account that does not have a satisfactory audit or you own shares in an ETF that does not have a reliable audit then take action. Take delivery of gold or move your investment to reliable and audited allocated storage.

I don’t know whether the statements made by the author of this article, or his assertions, are factually correct. I can tell you that about 2 weeks ago I spoke directly with representatives of the GLD ETF who directed me to an audit report prepared by Inspectorate International Limited, a UK based commodity inspection and testing firm. I revisited the GLD website this morning. By clicking here you can read a copy of Inspectorate’s latest report (dated October 21, 2009 - lower left side of the webpage) on the physical gold held on behalf of GLD on July 10, 2009 at the vaults of HSBC Bank USA National Association in London, England. This morning GLD reports holding 1,113 tonnes (35.8 million ounces) of physical gold valued at U.S.$40.6 billion.

I have thought hard about whether there is incremental risk attached to indirectly holding physical gold through an ETF (which is the largest Gold ETF, having accumulated the gold it holds from a standing start in late 2004) as contrasted to holding physical gold directly. While I don’t know how to quantify any such incremental risk, I have concluded there has to be some. My only real conclusion in this regard is: ‘How stupid would you feel if you were unable to realize on an indirect investment in physical gold when you could have held it directly‘. Anecdotally, a person I believe to be of modest means yesterday told me she owns physical gold, and has it buried in an undisclosed place - saving it for ‘a rainy day’. There are many reasons why I think ‘burying physical gold in an undisclosed place’ is not a great idea - but in the end it may beat holding physical gold indirectly.

I recommend that any reader who owns, or who is contemplating owning, physical gold either directly or indirectly click here and read the referenced article in it entirety and in context.