The ’sweat of the sun’ and ‘tears
of the moon’ are singularly unique commodities. They function
as unencumbered equity and function as a presentation currency. For this singular reason
they are largely hoarded not consumed and serve to protect against despotic
government inroads by preventing confiscation through inflation which is a
form of taxation without representation.
The ETFs GLD and SLV are commonly represented as
being bullion. Accepting this assertion is naive and with
potential financially lethal consequences. While GLD and SLV track the
relative prices that is where the similarities with bullion end.
On May 20, 1999 Alan Greenspan testified before Congress,
“And gold is always
accepted and is the ultimate
means of payment and is perceived to be an element of
stability in the currency and in the ultimate value of the currency and that
historically has always been the reason why governments hold gold.”
The ETFs GLD and SLV are not this ultimate form of
currency. I will raise only a few essential issues although there are
many.
QUALITY OF GOLD
Gold is a physical substance with a specific
definition and is listed as element 79 in the periodic table. Gold is
not subject to any risks and serves with complete fidelity only its master.
Drafted by securities attorneys usually earning $500+/hour the GLD prospectus, which is similar
to SLV’s prospectus, states, “Investing in the
Shares involves significant risks. See “Risk Factors”
starting on page 6.” Page 11 states “Neither the Trustee
nor the Custodian independently confirms the fineness of the gold allocated
to the Trust in connection wtih the creation of a
Basket [issuances].” Page 12 “In issuing Baskets, the
Trustee relies on certain information received from the Custodian which is
subject to confirmation after the Trustee has relied on the information.
If such information turns out to be incorrect, Baskets may be issued in
exchange for an amount of gold which is more or less than the amount of gold
which is required to be deposited with the Trust.” There is no
assurance that the ‘gold’ held in the ETFs is actually the same
gold as defined under the periodic table.
On page 11 “In addition, the ability of the
Trustee to monitor the performance of the Custodian may be limited because
under the Custody Agreement the Trustee has only limited rights to visit the
premises of the Custodian for the purpose of examining the Trust’s
gold”. Therefore, it appears that an audit of the actual
physical gold is precluded (Update:
See comments 25 & 26). In other words, ‘Just trust us, the gold is
there.’
COUNTER-PARTY RISK
The reassertion of counter-party
risk is driving much of the risk in the current markets. Page 10
states “If the Trust’s gold is lost, damaged, stolen or destroyed
under circumstances rendering a party liable to the Trust, the responsible
party may not have the financial
resources sufficient to satisfy the Trust’s
claim.” On page 9 “The Trust does not insure its
gold.” Further on page 12 “Gold held in the Trust’s
unallocated gold account and any Authorized Participanet’s
unallocated gold account will not
be segregated from the Custodian’s assets. If the
Custodian becomes insolvent,
its assets may not
be adequate to satisfy a claim by the Trust or any Authorized
Participant. In addition, in the event of the Custodian’s
insolvency, there may be a delay and costs incurred in identifying the
bullion held in the Trust’s allocated gold account.” Gold
is not subject to counter-party risk or in other words the financial ability
of a counter-party to pay. Clearly, GLD is impregnated with
counter-party risk that may instantly and violently appear from within like
the Alien.
CONFLICT OF INTEREST
There is economic incentive for the Custodians to
loot the ETFs. From page 9 “Under the Custody Agreements, the
Custodian is only
liable for losses that are the direct result of its own negligence,
fraud or willful default in the performance of its duties. Any such
liability is further
limited, in the case of the Allocated Bullion Account
Agreement, to the market value of the gold held in the Trust’s
allocated gold account with the Custodian, or the Trust Allocated Account, at the time such
negligence, fraud or willful default is discovered by the Custodian”.
Not only does the Custodian attempt to disrobe itself of liability but
even if it is found liable it tries to assert damages accounted at the time
of discovery of the default. The probability of such damages being
woefully understated relative to the potential future market value in the
event of such a default is extremely high. In effect, this provision
gives the Custodian a perpetual call option on the GLD hoard.
Who are these parties that say, ‘Just trust us, the gold is
there.’? Page 36 lists some Authorized Participants
including such venerable, safe and secure Wall Street behemoths as Bear,
Stearns & Co. Inc., Lehman Brothers Inc., Citigroup Global Markets Inc.,
Merrill Lynch, Goldman Sachs, J.P. Morgan Securities, UBS Securities and
Morgan Stanley & Co. Given the past actions of these firms I am not
sure I would want them anywhere near my gold.
For example, in June 2007 Morgan Stanley & Co. settled a class
action lawsuit for $4.4 million where the complaint alleged ‘that
Morgan Stanley told clients it was selling them precious metals that they
would own in full and that the company would store. But Morgan Stanley
either made no investment specifically on behalf of those clients, or it made
entirely different investments of lesser value and security.’
While the efficacy of the claim may still be at issue the Better
Business Bureau-like complaint from unsatisfied customers who initiated
litigation does not inspire confidence for those seeking to reduce risk.
During a credit contraction and liquidity crisis the
‘relationship goes out the window’. On December 12, 2008 UBS ‘UBS AG announced today it
has frozen one of its real estate funds until the end of next year, due to an
inability to keep up with redemption requests from wealth management
clients.’ Why? The spokeswoman said, ‘We closed the
fund temporarily for the protection of the investor’. It would be
most unfortunate to have one’s gold in the sticky fingers of such fine
and upstanding firms that refuse to deliver to protect you.
Additionally, the GLD and SLV hoards may pose
a convenient source of bullion for the United States government to
steal. Given prior tyrannical history with FDR’s Executive Order 6102 this may be a material
threat. On the other hand, Section 19 of the 1792 Coinage Act stated that those who ‘debased or
made worse as to the proportion of fine gold or fine silver therein contained
… shall suffer death’. Perhaps the Americans were more
civilized than their French counterparts and preferred the appearance of due
process of law when executing their bankers and politicians for destroying
their economies with fiat currency and fractional reserve banking.
ACCOMPLICES TO CENTRAL BANK GOLD PRICE SUPPRESSION
SCHEME
During the 1990’s Mr. Rubin had devised the
gold leasing scheme with the intent
being elucidated by Dr. Greenspan’s testimony in 1998, “Nor can private counterparties
restrict supplies of gold, another commodity whose derivatives are often
traded over-the-counter, where central banks stand ready to lease gold in increasing
quantities should
the price rise.” Many of the previously mentioned firms are
alleged by GATA to be complicit players in the central bank gold price
suppression scheme. Mr. Robert Landis, a graduate of Princeton University,
Harvard Law School and member of the New York Bar, has asserted that
“Any rational person who continues to dispute the existence of the rig
after exposure to the evidence is either in denial or is complicit.”
Is it possible that GLD and SLV hoards are
being surreptitiously used to continue the gold price suppression
scheme?
CONCLUSION
For those desiring to trade paper gold the GLD and
SLV vehicles may satisfy those requirements. But for those who desire
the ’sweat of the sun’ or ‘tears of the moon’ in
order to own the ultimate form of payment and therefore hearken to Chicken
Little’s warnings and protect their assets then the GLD and SLV
vehicles appear extremely deficient. Alternative
forms of holding allocated gold bullion exist that are affordable, secure,
convenient, trustworthy and not subject to counter-party risk. For
these reasons including (1) the quality of the gold is at issue, (2) no audit
of the physical metal is permitted, (3) counter-party
risk impregnates the investment vehicle and (4) there are strong
conflicts of interest with complicit players in the central bank gold price
suppression scheme; GLD and SLV appear impotent in reducing inflation or
counter-party risk. These are not risks to take during The Great
Credit Contraction.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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