More Questions About the ETF's Gold
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
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
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.
2004 by The Freemarket Gold & Money Report. All rights reserved
James Turk is the editor of Freemarket
Gold & Money Report
and the founder of GoldMoney