Kitco - Exclusive Commentaries

More Questions About the ETF's Gold

	By James Turk December 5, 2004
	www.fgmr.com

In my article “Where is the ETF’s Gold?” I raised important questions about the loose custodial controls being used to manage the assets of the new exchange-traded fund being sponsored by the World Gold Council. So far, the WGC has not responded, but investors have - they appear to have gone on strike.

After plowing money into GLD in the first days after its launch, since November 29th the fund’s assets have remained unchanged at 103.6 tonnes of gold. It is peculiar that the assets of GLD have not grown in a period when attention is being increasingly focused on gold as a safe-haven alternative to the US dollar, which continues to collapse on the foreign exchange markets. The US Dollar Index closed this past Friday at a new 9-year low, while gold ended at a new 16-year high.

This plateau reached by GLD may suggest that gold buyers are looking for safer ways to acquire physical metal, or perhaps to at least get some questions answered before they purchase GLD. I assume that most investors - like me - are concerned that the loose custodial controls of GLD raise risks that make the purchase of GLD shares unattractive. For example, why should anyone buy GLD when the fund has no ability to audit or even to inspect the gold it supposedly owns when it is stored in vaults of the fund’s subcustodians and sub-subcustodians?

Without strict controls over the assets of the fund, almost anything is possible. What if, for example, GLD were double-counting the same bar of gold? Impossible, you say, but…
Well, the GATA army has done it again, and thanks go to Stephen Marney. He analyzed the bar list reported to investors that shows the gold supposedly owned by GLD. <http://www.streettracksgoldshares.com/us/value/bar_list.php>

Last week Stephen brought to my attention that of the 6,981 gold bars reported on the list, there are 78 duplicate bar numbers. This result is staggering. It means that the genuineness of 156 bars, or 2.2% of the total assets of GLD, is called into question.

One of the first things you are taught in the gold industry is that good delivery gold bars that meet the standard of the London Bullion Market Association have a unique serial number. This exclusive number stamped into each bar is an important control mechanism that is used to track the bar throughout the ‘chain of integrity’, which defines the process by which LBMA members transact with one another. This process ensures that bars within the chain of integrity contain gold, and not gold-plated lead.

As long as a bar stays within the chain of integrity, each LBMA member accepts it based on the information stamped into the face of the bar, namely, that is said to contain a specific weight of fine gold. And in order to facilitate this process, each LBMA refiner stamps into the bar at the time it is fabricated a unique bar number.

In my experience, I have never seen or even heard of two LBMA good delivery gold bars with the same number. But to test my understanding, I telephoned two experts in gold vaulting to get their view.

Neither has seen a gold bar with the same identification number. One said it was impossible to have duplicate numbers. The other said that it was in theory possible that two bars could have the same number because of some human error in the numbering process when bars were stamped manually, which used to be the way bars were fabricated years ago, but the odds of that happening were extremely small. Both were as staggered as I was to learn that 2.2% of the assets of GLD were comprised of bars with duplicate numbers. Neither one could understand how it was possible, but I do have an explanation.

It is the explanation proposed in my previous article, namely, that GLD is being used as a tool to manage the price of gold. This outcome is made possible because gold supposedly owned by GLD but stored in the subcustodians and sub-subcustodians cannot be verified to exist. The bars cannot be audited. They cannot even be inspected. Given that most gold cleared through the London market is stored in the Bank of England, which repeatedly is at the center of allegations that the gold price is being managed, GLD is a wonderful tool for manipulation. The scam would work like this.

Investors send, say, $50 million to their brokers to purchase GLD, but there are not sufficient shares available to fill this order. So the $50 million therefore ends up with one of the Authorized Participants, which now uses the money to buy gold to create new GLD shares. The AP buys this gold in London, and the bars it has reportedly purchased remain in the Bank of England, one of GLD’s named subcustodians. But do the gold bars really exist?

No one knows, and there is no way to verify their existence. Maybe all of GLD’s 156 suspect bars are stored in the Bank of England. The bar list does not report where the gold bars are stored. So instead of being used to purchase gold bullion, the $50 million in my example could instead simply vanish into thin air, helping relieve the upside pressure on the gold price - and making the dollar look better than it really is. After all, that is what the management of the gold price is all about. Today, like the 1960’s and 70’s, its aim is to make the dollar look worthy of being the world’s reserve currency, when in fact it isn’t.

Stephen first brought his discovery to my attention last week after the November 26th bar list was reported. The GLD website says: “The gold bar list is updated every Friday at 4.30 p.m. NYT commencing November 26 2004.” So I asked Stephen to keep his discovery to himself until the December 3rd bar list was reported, thereby giving GLD the benefit of the doubt by waiting to see whether these duplicate bars would be changed. I downloaded this latest bar list, and it is identical to the one reported the previous week, with the same duplicate bar numbers.

I have already recommended that investors avoid GLD because of the risks arising from its loose custodial controls. I now understand that GLD is being purchased by mutual funds. I therefore recommend that investors avoid those mutual funds that are buying GLD. There is just too much risk, as this latest discovery of duplicate bars indicates. Be sure to inspect the December 31st year-end balance sheet of your mutual fund to see whether it held any GLD. Better yet, contact your mutual fund to make sure that they are not buying GLD.

***