Fools Gold

Here is a story from Gold-Prices.biz newsletter that relates to our old trade GLD. But more than that it supports what Jason Hommel and others have been saying about precious metals market, that what you can drop on your foot is real and the paper gold you can burn right along with her dollars. Here are parts one and two.

Part One:

This gold fund currently has a market capitalization of $27.00 billion, but does it really have the physical gold it reports to have or is it some form of paper equivalent?

We decided to ask them directly and found that their answers to be somewhat surprising.

14 February 2009
Dear Sirs,

We host a web site called www.gold-prices.biz where we have 6781 subscribers and up to 35,000 casual visitors on a daily basis.

Our readers have noted that your fund acquired another 45 tons of gold last month, which is a fantastic achievement, as your fund goes from strength to strength.

However two questions pop up:

1.Who sold the 45 tons of gold to you?
2.How can we prove to our readers that you actually have the metal and not the paper equivalent.

If you could provide us with an explanation that we could post on our web sites then it would give our readers and us for that matter the confidence to invest in GLD.

Best wishes,

Bob Kirtley
www.gold-prices.biz

14 February 2009
Bob-

Please see pages 25-29 in the GLD prospectus (Creation and Redemption of Shares section) for more insight about transactions that occur with Authorized Participants at: www.spdrgoldshares.com

Best,
Todd

14 February 2009
Todd,

Thank you for your very prompt reply it is much appreciated. However your reference to pages 25-29 of the prospectus covers regulations in a general sense but you have not answered the two questions that we have tabled. So could you please provide us with answers to these two questions?

1. Who sold the 45 tons of gold to you?
2. How can we prove to our readers that you actually have the metal and not the paper equivalent.

Best wishes,

Bob Kirtley
www.gold-prices.biz

14 February 2009
Bob-

The Authorized Participants buys the gold, not the Trust. The section I referred to deals with Creation and Redemption of shares. This is important in understanding where the gold comes from and how the fund actually operates. We are currently working on a piece that addresses this issue and it will be posted on the website.

14 February 2009
Todd,

The questions still stand, which Authorized Participants bought the 45 tons of gold and who did they but it off?

Who audits each of these Participants holding of physical gold and provides the proof that they actually have the gold?

Best wishes,

Bob Kirtley
www.gold-prices.biz

17 February 2009

Is there anything else that you would like to add before we go to press?

Best wishes,
Bob Kirtley

18 February 2009
As far as “proof” that we actually hold physical gold; you can visit the website and download a copy of the gold bar list which numbers each gold bar. Moreover, page 26 of the prospectus lists all the Authorized Participants. Where they attained the gold is something I cannot answer.

We draw your attention to the very last sentence – they do not know where they attained the gold!

This statement gives us cause for concern, with such big numbers involved we would have thought that an approximate breakdown of who has supplied them with the gold would have been readily available. There should be in existence an audit trail which accounts for every bar of gold and then when a purchase of say 10 tonnes is made we could all see who the seller was and get some validation of the transaction.

In conclusion this is just too vague for us and we are not comfortable at this juncture with SPDR Gold Trust as an investment vehicle. For disclosure purposes we do not own this stock, however we have traded their options in the past.

SPDR Gold Trust trades on the NYSE under the symbol of GLD, has a market capitalization of $27.47 billion with 280.90 million shares outstanding and the average volume of shares traded is 19.74 million.

We will however attach any further comments the company wishes to make to this article as it is only fair to do so.

Got a comment, then fire it in.

Stay tuned folks..

Part Two:

This gold fund currently has a market capitalization of $27.00 billion, but does it really have the physical gold it reports to have or is it some form of paper equivalent?

We continue with our investigation into how this fund is able to acquire so much gold so quickly with a series of questions and answers. We start with the latest response from GLD:

Bob-
Following up on our previous correspondence regarding the SPDR Gold ETF (GLD), Authorized Participants buy the gold for creation orders in the global over-the-counter market, which is deep and liquid and trades 24/7. The OTC is the wholesale market for gold, and transactions are based on London Good Delivery bars, weighing approximately 400 ounces. The normal quotation in the global OTC wholesale market is for settlement in London Good Delivery bars stored in London vaults, such as the one owned by HSBC where the Trust stores all of the GLD gold. In fact, much of the gold APs deliver to the Trust to create new GLD shares was already in the HSBC vault, so the bars simply had to be allocated to the Trust and carried over to the physically segregated section of the vault.
Moreover, please visit the following site to view the GLD frequently asked questions: http://www.spdrgoldshares.com/sites/us/faqs/
Hope this is helpful,
Todd

Hi Todd,

Thank you very much indeed for replying to us so promptly it is very much appreciated.

However our question of Who sold the 45 tons of gold to you? remains unanswered.

If as you say much of the gold was already in the HSBC vault and has now been reallocated to the GLD trust, then it should be easy for HSBC to tell us from whom they purchased this gold.

Could you please ask HSBC to supply you with a breakdown of this purchase of 45 tons of gold, then we would have some transparency with this transaction and much of the mystery would be removed.

Best wishes,

Bob Kirtley

Team, Please remember that we are not investigative journalists and may not be asking the the right questions but we do seek to establish some clarity in terms of how so much gold can be accumulated in such a short space of time and who are the sellers standing on the opposite side of these trades.

On a positive note we include this snippet by Denis Gartman in that he is confident that HSBC are holding gold for GLD as seen on BNN
The Street : February 26, 2009 : Ask Gartman [02-26-09 8:50 AM]
February 26, 2009

Guest co-host Dennis Gartman, editor and publisher, The Gartman Letter, takes viewers’ questions and emails.
Click this link

As we see it, if you buy into GLD you are effectively buying an IOU from GLD for a quantity of gold, they in turn have a back to back agreement with an enterprise such as HSBC who give GLD an IOU for the same quantity of gold.
The gold for the most part remains in the vault and is re-allocated to the latest purchaser.

To be comfortable we would still like to know who sold it to GLD and if that data is not forthcoming then it is not for us. If you are comfortable with this vehicle for your investment needs then we wish you well and hope that our concern is unfounded.

SPDR Gold Trust trades on the NYSE under the symbol of GLD, has a market capitalization of $26.15 billion with 280.90 million shares outstanding and the average volume of shares traded is 22.55 million.

We will however attach any further comments the company wishes to make to this article as it is only fair to do so.

Got a comment, then fire it in.

Stay tuned folks..

I never thought I'd say it , but right now I actually like Dick Cheny's torture idea.