Wikinvest Wire

Yousa! Eight thousand tonnes!

Monday, February 23, 2009

The folks over at the iShares Silver Trust (NYSE:SLV) were quite busy last week, adding a total of 420 tonnes of silver to their stash, pushing the inventory at the world's most popular silver ETF above the 8,000 tonne level for the first time ever.
IMAGE Since the first of the year, they've added 1,234 tonnes to the trust, an increase of about 18 percent. During that time, the price of silver has risen almost 30 percent, the best performing commodity so far in 2009 by a wide margin.

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Full Disclosure: Long SLV at time of writing


dearieme said...

great! When should we sell?

Anonymous said...

not yet... at least wait until it hits $20 or so...

Anonymous said...

sure they are buying physical silver - just like the guys over at GLD

Dan said...

These ETFs "make their own gravy".

Nostradamus, apparently said...

There is a lot of speculation that precious metal ETFs do not have the physical metals.

I am beginning to see this on various blogs from around the world but nothing from official sources.

It seems obvious to me that people who are interested in precious metal ETFs would want to know the answer to this question ASAP.

If the gold, silver, etc. exist in the vaults in the claimed quantities, then it should be possible for the ETFs to prove it and dispel the rumors. (The mere fact that there is apparently no reliable system for verifying the inventory is enough to raise a big alarm.)

Promises are not adequate. If the Madoff scandal teaches anything, it's that investors need to be much more diligent and demanding.

Again, if there's no truth at all to these persistent rumors, why doesn't someone from the ETF step up and prove them wrong?

It's VERY fishy!!!

Tim said...

Here's an interesting comment from Is the GLD ETF Really Worth Its Metal?:

I note the following in the 10K:

"Gold held for the Trust Allocated Account will be held by the Custodian in its own London vault premises except when the gold has been allocated in the vault of a subcustodian, and in such cases the Custodian has agreed that it will use commercially reasonable efforts promptly to transport the gold from the subcustodian’s vault to the Custodian’s London vault, at the Custodian’s cost and risk. Nevertheless, there will be periods of time when some portion of the Trust’s gold will be held by one or more subcustodians appointed by the Custodian or by a subcustodian of such subcustodian. Gold held by the Custodian’s currently selected subcustodians and by subcustodians of subcustodians may be held in vaults located in England or in other locations.

In other words, you can't assume there is a big issue with gold held by subcustodians unless you also assume that the Custodian has purposefully not used "commercially reasonable efforts promptly to transport the gold from the subcustodian’s vault to the Custodian’s London vault". Is there any evidence that prompt transport is not taking place?

As for "investment in gold" vs. "gold", that is simply semantics and there is no relevant distinction between the two. It is standard to use "investment in" as a balance sheet caption and actually preferable in this case. At the same time, you wouldn't say "proceeds from the sale of investment in gold". In any case, International Accounting Standards don't apply here at all, U.S. Generally Accepted Accounting Principles and SEC Rules and Regulations do.

The main problem with all the "audit doubters" is they totally discount the fact that the sole asset on the balance sheet of GLD is gold and there is virtually no risk that auditors would issue a report on the financial statements without performing adequate audit procedures which necessarily include a physical inventory. This is more than just a "peek" -- there are specific auditing standards that spell out precisely how to test gold in custodial possession.

Gina: The specific gravity of uranium is 19.05, for lead it is 11.35 but for gold it is 19.30. These differences are large enough that gold plated lead over DU can be easily detected using minimal procedures, not to mention that it would be exceedingly difficult to manufacture such bars. More likely if someone was going to do something like this they would use actual gold bars fabricated by refiners and subsequently drilled and filled by the fraudsters with about 40% tungsten (SG of 19.30, same as gold) but even that would involve a large chain of participants with a high risk of discovery.

Consider_this: The Satyam fraud apparently involved collusion by two PwC audit partners who were bought off. In any case, you don't test bank balances by sending people to the bank premises, you send a bank confirmation through the mail. You also look at bank statements and test some of the transactions by tracing them back to source documents. Could the auditors for GLD have been bribed like the Satyam auditors apparently were? Sure, but it's just as likely that the auditors for any other company have been bribed (which is not very likely at all for any particularly company, but clearly it does sometimes happen). The bottom line is that GLD is not unique in this respect, you could say the same thing about every company that gets audited.

Ironically, the risk of potential malfeasance is actually higher in an operation like Central Fund, Central Gold Trust, Bullion Vault, GoldMoney, etc. where the chain of authority is highly centralized and there aren't many overlapping checks and balances in place. Most of the recent frauds including Madoff, Satyam, Stanford, Adelphia, Worldcomm, etc. involved highly centralized operations with little segregation of duties or proper oversight at the executive level. These are all essentially very basic frauds with little collusion -- operationally very different from GLD and SLV where duties are decentralized between the Sponsor, Trustee, Custodian, subcustodian and Authorized Participant. If there is collusion between all of these parties it is a complex, extremely risky proposition that has no precedent.

In closing I'll note that London bullion vaults have not suffered an uninsured loss in several hundred years of operating history. Simply put, if you are worried about being cheated out of gold or silver, it is preferable to store it in a public warehouse run by many employees instead of a private facility run by one or two guys (or gals).

Bruno said...

Thanks Tim for that very illuminating and commonsense information. I had started to get worried some from the sheer number of people hinting at some problem at GLD with auditing.

I had also come to the conclusion after visiting their websites that some of these relatively small and closely held gold alternatives mentioned seemed almost more likely to have fraud problems.

I guess in this day and age anything is possible. A couple of questions for you.

1. Do you think it is nontheless wise to diversify from GLD into other ETF's like IAU and the Canadian Central Gold trust?

2. I own a lot of DGP (deutshe bank double long gold trust) and it's made me a lot of money these past few months. I dont' want to sell it, but I'm hearing bad news about DB. Being an ETN, do I have a serious counterparty risk here and if problems do arise will they come with some warning time or not?

3. Finally, what other alternatives are there to gain some leverage with gold that are "user friendly" and not involving margin debt?

Thanks, you seem to be the go-to guy on this topic.

Anonymous said...

If you don't like GLD. Take delivery of coins. They are hard to fake and effectively out of the system.

Nostradamus, apparently said...

The Madoff scandal was the straw that broke this camel's back and I'm spitting mad.

Sadly, fraud and corruption are now a way of life in America. The current financial crisis has begun to reveal fraud in staggering numbers and you'd have to be brain dead not to think of the possibility of fraud every time you turn over your hard-earned savings to someone who makes promises to you.

Standard & Poor's, Moody's and Fitch all rated the Mortgage Backed Securities as "AAA" when in fact they were junk, as we now know.

I know people who work for Deloitte (and their ilk) and their audit assurances don't mean any more than the ratings from Moody's, et al.

Until things have calmed down A LOT MORE, I'll stick with things I can verify for myself. Sadly, this means getting the pathetically low CD yields from FDIC insured banks.

If you want the higher returns, we all know that it means you're taking on greater risk.

GLD and SLV have been great but this is just one of the risks...

As Tim says, it's no greater risk than many other investments out there. I raised the issue because the rate of claimed inventory accumulation for gold seemed almost impossible. As I said earlier, maybe I'm crazy...

dearieme said...

Very helpful. Thank you. Do you have any views on the reputation of the Perth Mint?

Tim said...

I plan to write more on the subject of SLV, GLD, and their inventory, probably this week. BTW - SLV added another 150 tonnes this afternoon.
I've always advocated buying coins and bars first - up until storage becomes an issue. Physical bullion has many, many advantages over everything else.
Diversity is a good thing - CEF, GoldMoney, BullionVault, Perth Mint, Kitco - do your own due diligence on each, but, the reason why GLD and SLV are far and away the most successful is that they were first to market (in a big way) and they are so convenient.
I don't like ETNs or leverage, so I'm afraid I can't be of any help there.

Bron said...

I think the Perth Mint is the most reputable organisation there is, but then I work there so of course I'd say that! :)

I have recently seen many comments how the "large" amounts of metal flowing in are a smoking gun. For gold they are focusing on mine production but ignoring the above ground 155,000t stocks, which will come on to the market if the price is right. Working in the industry I don't consider the ETF inflows to be unrealistic. They are certainly large, but the depth of the London physical market can handle it.

Anonymous said...

Physical gold is scary in a different way. I know I don't want $300,000 buried in my back yard, nor can one really store it at home safely. If you buy an expensive safe that will actually protect it the safe company knows you have gold and someone there may be "connected" and set you up for a ripoff (or worse) when the SHTF. Plus the place that sold it to you knows you have it. They could be "connected" and do likewise. Same for the driver who delivered it. They're not idiots and know that a package that is very very heavy could be gold, not to mention other identifiers on the package. (even plain brown wrapper denotes something)

Then there's storing it in vaults. That is expensive and leads back to having to TRUST someone in a time when apparently all the rules are being tossed out.

Then you're left with the Perth Mint/goldmoney/bullionvault types who to me offer little more than GLD or IAU in terms of believability. And certainly less convenience.

I can also see no advantage in terms of protection from govn't seizure or taxation because if you read their websites you can't just show up and pull your gold out after flying there. And if it's in an IRA the govn't already knows you have it. So buying it outside of your IRA costs you 28% off the top as you lose the tax deductibility.

There really is no clear cut answer that I can see.

Ah the good old days when you could make some money and just put it in the bank and let it grow slowly but safely.

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