Wikinvest Wire

Where does the Gold ETF get its gold?

Thursday, March 26, 2009

One of the most commonly heard "theories" about how the world's most popular gold investment product - the SPDR Gold Shares ETF (NYSEArca:GLD) - is defrauding investors is that the trust can't possibly contain the gold they say they have because there is no evidence of any transfers of this size on any gold market.

The logical conclusion, of course, is that the ETF is a sham.

All it takes is a simple phone call to completely debunk this "theory", something that, to my knowledge, no one has bothered to do until about an hour ago when I picked up the phone and began dialing after quickly locating the contact page at the GLD website.

Anyone wanting to cast doubt on the quantity and/or quality of the bullion backing the gold ETF should start looking at HSBC (Hongkong and Shanghai Banking Corporation) instead of the Comex or any other gold market because that's where the gold transfers occur.

In a quite pleasant conversation with Natalie Dempster, Head of Investment in North America for the World Gold Council, it was learned that most of the purchases made by "authorized participants" on behalf of the trust result in gold being transferred from "unallocated" accounts to "allocated" accounts for the trust at HSBC in London.

Since these are internal transactions, records are not made public.

That's why no one can "see" where the gold is coming from.

As noted on many occasions before, it is my firm belief that if you really want to "own" gold, you should buy the stuff in physical form and then put it somewhere safe. Anything short of that - whatever you buy and from whomever you buy it - is a distant second to this option if your aim is to ensure that the stuff is really there.

Now, I have no idea whether HSBC is doing what they say they're doing or whether they are another Bernie Madoff outfit, filling out all the proper paperwork and putting smiles on their customers' faces until the day eventually comes when they are revealed to be another massive fraud.

Maybe someone should call HSBC and ask them for these records.

But, to simply say that the ETF can't have the gold they say they have because no one can see these transactions on any market, yet no one bothered to pick up the phone to ask the people who run the fund just why that might be .... well, that's about the sloppiest bit of logic and the worst financial writing I've come across lately.

[Note: For those of you haven't already seen it, there is a highly informative and recently expanded list of Frequently Asked Questions at the GLD website.]


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Full Disclosure: Long GLD at time of writing


Dan said...

Exactly. And why have any doubts? Just buy the damn stuff and store it yourself. There are worse things you could do.


Anonymous said...

Great idea - call them! Duh!

Anonymous said...

There might be some gold held in storage but definitely not all. The custodians are highly suspicious at best. Too bad they do not have a question on 3rd party audits???

Anonymous said...

Thank you for this.

People who really believe there's a conspiracy shouldn't own any stocks with a broker, have no insurance, and should have no money in the banks because the scenario they're worried about is the total breakdown of financial markets. (I've read some commentators who are consistent in this.) Anyone comfortable enough to hold other paper assets should be fine with a gold ETF, though there are plenty of good reasons to hold physical metal.

EconomicDisconnect said...

Great post, as usual.

Tim, I would love your opinion on having gold stored in a safety deposit box in the US? In the 1933 travesty that did not work out so well. What are your feelings on today?

Davey Jones said...

Oh well, if the people running this ponzi scheme say it's not a scam, then they must be telling the truth, right?

Silly us for not believing them. I'll send what's left of my Madoff fund over to them. Thanks for your insightful investigative journalism,n it's really set my mind at ease.

Anonymous said...

Davey, You really should read more carefully before you go spewing off nonsense. This was a very specific counter to an argument that has been made by many supposed experts, not an "all clear" for the ETF.

Anonymous said...

I always thought they got it from leprechauns, and at the end of rainbows. They have specially outfitted trucks that get there before anyone else can and remove it.

But after this article, what say we all meet at Tim's house with shovels and start digging up his back yard?

Tim said...

In response to the question of safe deposit boxes, a quality home safe is a good alternative but safe deposit boxes are fine as long as you keep abreast of rumblings regarding what the gubment is doing so that you can make a timely withdrawal, if necessary.

Anonymous said...

The problem I see with home safes are:

1. Anything heavy duty enough and installed well enough to prevent it being carried off may require the aid of outsiders, all of whom may well be selling your name and address to thieves one day. If that happens more than just your gold will be at stake.

2. A fire proof small safe could be transported away for opening. I've worked in retail and seen rather large ones ripped from bolts set in concrete.

3. If one buys enough physical gold at one time and has it delivered, someone there will know you have it and again passing that info onto Tony Soprano's crew is a possibility.

I guess buying it in small amounts with cash and paying that premium, then hiding the safe you put it in somewhere would be a solution. Inside a wall, perhaps. Not particularly handy, though. Or doing a little midnight gardening.

Tim said...

re: midnight gardening, the most creative idea I've heard in recent years is to take your gold, a shovel, and a gps out to your favorite hiking trail and then pick spot to go off 100 or 200 yards from the trail, bury it, and note the GPS coordinates.

Anonymous said...

and what do you do when GPS doesn't work anymore and you will REALLY need to go dig up that gold? Seriously, gold is a very dense metal. You can store far more than you think around your house and no one will find it, and it will 'store' lots of value. There isn't even a need for a safe unless you are talking in the plus 100K value range. And even then, buying bars instead of coins can alter your storage requirements as well.


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