An Open Letter to the Bullion Desk
Lines are being drawn in the debate about the
new exchange-traded fund developed by the World Gold Council,
which is listed on the NYSE under the symbol GLD. Several
items have recently appeared on www.thebulliondesk.com,
for which I am compelled to respond lest there be any misunderstanding
about my point of view on this new product.
Dear Bullion Desk:
Your recent editorial commentaries about GLD have not been
helpful. They have fanned the flames by adding opinions, rather
than facts, to the debate.
I am therefore pleased to see that you have removed some of
this material from your website.
One thing people can still read on your website though is
the "Open Letter to GATA" by a gentleman named David
Walker, which you chose to publish. Given that it is an opinion
piece, rather than a factual news report, I assume that you
published it because it serves your point of view, even though
the letter is wrong in some important respects.
For example, regarding the Bank of England, Mr. Walker wrote:
"The Fund has no relationship with the Bank of England.
The Bank of England was listed as a POTENTIAL subcustodian
that the Custodian MIGHT use in the normal course of business.
Certainly HSBC being the largest LBMA member would more than
likely have dealings with the BoE from time to time. During
my conversation with the Fund representative Mr. David Smith,
he mentioned that there has been talk of discontinuing the
BoE as a POTENTIAL subcustodian."
Both you and Mr. Walker should do your homework, and the fund's
representative to whom Mr. Walker spoke should be 'called
on the carpet' for disseminating incorrect information. The
relationship with the Bank of England is not a "potential"
one, but rather, already in place. The following is from p44
of the prospectus: "The Custodian is authorized to
appoint from time to time one or more subcustodians to hold
the Trusts gold. The subcustodians that the Custodian currently
uses are the Bank of England and LBMA market-making members
that provide bullion vaulting and clearing services to third
It would also be useful to post a counterpoint to a news item
on your website by David Elliott of Dow Jones. Addressing
the discovery that GLD's bar list has duplicate numbers, the
title of his article, "Duplicate Numbers on Gold Bars
Normal - Johnson Matthey", is totally erroneous.
Contrary to Mr. Elliott's assertions, Johnson Matthey did
not say that having the same number on a bar is "normal"
or "standard practice", as Mr. Elliott contends.
Here is exactly what Johnson Matthey wrote:
Clearly, it is not normal to have two bars with the same number
- it is an exception.
The JM letter makes it clear that only part of the bar number
was recorded by GLD. The pre-fix to the bar was not recorded
in the bar list reported on the StreetTracks website.
GoldMoney pioneered the online reporting of audited gold bars.
Using GoldMoney's bar list as an example, here is how the
JM-UK bars should have been reported (note the first two bars
on the list). http://goldmoney.com/en/bar-count.html
To Mr. Elliott's credit, he did quote me accurately: "The
problem is that without having the ability to audit all of
the assets of GLD, there is no way of verifying whether this
error by GLD was a simple bookkeeping error, or whether other
factors were at work." Hence, this error of duplicate
bar numbers demonstrates the need for auditing all of the
gold within GLD, and not just the gold in the custodian.
So this important issue remains unanswered. Why isn't all
of GLD's gold audited? If it were audited, simple bookkeeping
errors (e.g., recording only part of the bar number) would
be caught by the auditors, and corrected. And if it were anything
but a simple bookkeeping error, the auditors would catch that
I have taken a lot of arrows in my back recently, including
the ones emanating from your website, but none of the substantive
questions that I and other people have asked about GLD's basic
governance - whether or not the questions were posed by members
of GATA - have been answered. These include, to quote Chris
Powell of GATA:
||Why have all the custodians
and potential custodians of the fund's gold not been identified?
Why is the fund refusing to let its gold holdings be fully
and publicly audited?
Is any of the fund's gold being leased, made available
for leasing, or encumbered in any way?
||Exactly what is the fund's
relationship with the Bank of England, a major lessor
Therefore, if independent third parties do not audit all of
the gold, how are we to know that it really exists? And if
we cannot prove that the gold exists with audits and inspections,
how can GLD be considered as a means for investors to buy
physical gold, which is how it is being popularly portrayed?
The WGC explained at various industry conferences in the past
that the ETF's objective was to provide investors with the
means to acquire physical gold by purchasing a tradable security.
I happen to know quite a bit about this topic of using accounting
to represent physical gold because we had to address this
matter in building GoldMoney. Holding gold in your hand is
one thing - but storing it in a vault is something altogether
different. But there are risks to both. For example, is the
coin you are holding really gold, or just gold-plated lead?
And is the gold you store in the vault, safe and secure? To
provide our customers with assurances of integrity about the
safety of their gold, all of their gold is audited.
One of my GoldMoney colleagues and I discussed GoldMoney's
custodial arrangement and auditing in meetings and telephone
discussions with the WGC in 2003. Further, the WGC had a whole
year to act on the article I wrote in December 2003, which
identified the same custodial weaknesses identified in my
recent article. Why didn't they do anything to fix the problem
Here's a useful analogy. Not too far from where I am writing
this letter there is a massive public works project called
the 'Big Dig'. It aims to build an Interstate highway by tunneling
under Boston, which as everyone knows is a port city, so there
is a lot of water about.
After spending $15 billion, the project is nearing completion,
and it has been reported that the 'Big Dig' has a leak because
it was not built properly. So we are now hearing from numerous
experts who warned the 'Big Dig' builders before construction
began about the unique soil conditions in the area, advice
that apparently went unheeded.
The same is true for GLD. It has a 'leak' because it was not
built properly. Gold the fund supposedly owns in subcustodians
and sub-subcustodians cannot be audited or inspected to verify
that it really exists.
Now, I don't know whether 'Big Dig' can be fixed, but GLD
can be fixed very easily. Store all of the gold bullion in
HSBC, the fund's custodian, and eliminate all subcustodians
In the rush to begin the 'Big Dig', some basic considerations
were overlooked. So too with GLD. In their rush to launch
an ETF, the WGC overlooked some basic building blocks, like
ensuring that all of the gold owned by GLD is audited. Why
the oversight? Why the rush? Why were the warnings in my 2003
meetings and December 2003 article ignored?
I will leave it to others to investigate and to get answers
for those questions, but until all the basic issues are investigated
and everyone's questions are answered, it is not 'time to
move on', though that is what you propose in a December 9th
editorial posted to your website.
In that editorial you say: "We stand by our view that
it is a shame that a product that many people have worked
tirelessly to get through the maze of regulation and finally
to market - in response to calls for greater access to the
gold market - should be subject to allegations which have
not clearly helped confidence."
What good does it do working tirelessly to get something through
the regulatory process spending a reported $15 million if
it is not built right? And why the innuendoes? It's not the
legitimate questions about GLD that have hurt confidence.
Rather, it has been adversely affected by a fund launched
with so much promise and anticipation that turns out not to
be an alternative to buying physical metal, and won't be until
all of the gold is audited. Confidence has also been hurt
as the WGC's unwillingness to answer the legitimate questions
posed to them.
I explained this point to Tim Wood, of Resource Investor,
who wrote: "The WGC has avoided commenting on the
gold fund in any way for fear of trespassing Securities &
Exchange Commission rules regarding open ended securities
that are deemed to be a perpetual offering. Turk has no sympathy
since he does not believe the SEC would object to clarification
or reasonable communication about critical issues."
This point is also made in an excellent article by Ed Bugos,
"GLD: Incompetence or Told You So?" His article's
subtitle addresses this key point precisely. "If it's
genuine, questions inspire confidence - once answered."
Your December 9th editorial goes on to say: "For the
vast majority who will be happy with that risk and want an
opportunity to participate in moves in the gold price, then
the new ETF provides an easy and efficient way to do it."
I doubt if you can speak for the majority of gold buyers,
but we do share a common view in one respect. GLD tracks the
gold price. But the point you seem to miss is that until and
unless all of the gold within GLD is audited, it cannot be
viewed as an alternative to buying physical gold. Because
that is what GLD was intended to do, I contend that GLD is
seriously flawed because it does not provide for auditing
of all of the gold owned by the fund. Without this independent
third party verification there is no way to establish whether
all of the gold owned by GLD really exists.
As this debate widens, new questions are now being raised
about GLD. For example, in the article referenced above Ed
Bugos asks, can borrowed shares of GLD be redeemed for gold?
If so, who's to stop one of the Authorized Participants from
borrowing GLD shares, redeeming them for the gold bullion
in the vault, and then removing that gold to lend it to earn
Let me sum up by quoting Chris Powell of GATA: "When
the exchange-traded fund reports gold bars with duplicate
serial numbers (even if there really are separate bars somewhere),
when the fund happily declares that it may not even know the
identity of the custodians of its gold, when the fund has
a relationship with the biggest and perhaps most nefarious
gold-leasing and gold-selling financial institution in the
world, and when the fund does not forswear leasing its gold
and thereby assisting the suppression of the gold price, investors
generally and gold's partisans particularly should be skeptical."
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