Ron Struthers in his Resource Stock Report - V16 #8.2 – Gold, Gold Stocks, - June 9, 2010 shows how most of the new investment in Gold by unwary investors is being siphon off by Investment Banks, suppressing the price of the very asset these investors believe they are invested in:
“Huge amounts of money is coming into the gold market, but a lot of it is into the ETFs like 'GLD'. Gold ETP flows hit a record of $26 billion to May 25, from the beginning of 2009, buying more than 2,000 tonnes of the precious metal, according to Barclays Capital. At ETF Securities, a Mr Brooks says "larger flows in the past month into physically backed gold ETCs than at the height of the financial crisis." In one week last month (May 7-14),trading on its ETC platform hit an all-time high of more than $2 billion, driven by strong trading volumes in precious metals.
Gold funds tracked by EPFR, the US global fund data group, saw $5.7 billion of net inflows in the three weeks to May 19, of which nearly $5 billion went into exchange-traded funds. $5 billion into ETFs in 3 weeks is enormous. A few years ago we seen a record $5 billion or so raised in funding for all gold mining companies over a course of 1 year and we thought that was enormous. Now we see more than that come into the gold market in 3 weeks, WOW!!!!
The obvious question is why gold is not going a lot higher and the gold stocks not moving. First off $$ going into gold ETFs does nothing for the gold stocks, it just lines the pockets of the Investment Banks that dreamed up these ETFs and derivatives. It is doubtful that it even creates gold demand as these ETFs only have paper claims to gold and no clear physical custody. The prospectus is sketchy and for sure there is no audits of gold holdings. It is on the word of these Investment Banks and we know how good that has been in the last several years.
We have learned what was believed to be the best physical market (London) is probably more leveraged than the Comex with admission there is about 100 to 1 leverage in London. Meaning there is a 100 one ounce paper claims for every one ounce of physical gold. These ETFs are no doubt just more piles of paper claims. Investors need to be educated about the gold market. They need to realize that these sketchy ETFs are full of risks and might not fulfill the goal in for which they were bought: The Investment banks that run and back these are technically insolvent and bankrupt. The same Investment Banks that back these ETFs and claim custody to the so called physical gold also have the largest short position in gold on the market. A conflict?
The gold ETFs are beginning to trade at a discount to physical. When you need these most they may not trade. Gold ETFs like 'GLD' ceased trading for 15
minutes like other stocks when we had the so called 'computer glitch' last month. For many reasons these ETFs might be halted or not trade for days or weeks, 911 was an obvious example. At least with the true Physical Backed investment vehicles that are backed by gold and audited, at the end of the day you know your investment is 100% backed by gold locked in vault. The gold ETFs and other ETFs are the prime targets of the Investment Banks, flash trading and computer trading programs that front run orders and skim pennies and fraction pennies or even nickles and dimes from all other investors.
So education is needed to get investors to buy the right gold backed trading vehicles like James Turk Gold Money, Central Fund, Sprott Physical and I have mentioned before the Bullion Management Fund. This will create more demand for physical gold and drive the price higher or at least to a level it should be.”
Here's how ETF's work:
1.) Investment Banks write pieces of paper 'promising' Gold.
2.) They are issued ETF Gold shares in exchange for these paper promises.
3.) They sell these shares for cash on the open market.
4.) The investment money is dilluted by up to 100:1 and so Gold fails to reflect its' true higher supply/demand value.
As Dire Straights sang back in 1985 'Get your money for nothing and your chicks for free!'
If you want to understand the basic mechanics of the ETF Gold Scheme I would suggest you read Reg Howe’s recent article ‘Gold Derivatives: GLD and Ass Backwardation’
Disclosure: Long on Physical Gold and Silver and Mining Shares
Disclosure: Long on Physical Gold and Silver and Mining Stocks