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In
December I published A Problem With GLD and SLV ETFs where I briefly perused
the GLD prospectus. It concluded, “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.”
QUALITY
OF GOLD
From
the original article, “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.”
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).”
READER
COMMENT RAISES AN ISSUE
A
perceptive reader commented (#25):
But
I’m not sure how you get to “an audit of the actual physical gold
is precluded” from “the Trustee has only limited rights to visit
the premises of the Custodian for the purpose of examining the Trust’s
gold”. “Limited rights” is not “no
rights”.”
If
Deloitte’s statement of 21 November in the 10-K is to be believed, they
have “audited the … statements of condition … [and] such
financial statements present fairly, in all material respects, the financial
position of the Trust”. Now I am quite ready to be sceptical about the
lengths DT went to check the gold was there. But, on the face of it, they
have effectively stated that the $20bn worth of gold as per the balance sheet
really exists and really belongs to GLD. And it’s hard to imagine they didn’t at least send someone
to the premises of the Custodian to have a quick peep, though
of course in this crazy world of mediocratic financial services it is
probably unwise to have 100% faith even in that. [emphasis added]
TRUST
AUDIT RIGHTS OF THE CUSTODIAN OR SUBCUSTODIAN
The
latest 10-K ( Commission File Number 000-32356)
on pages 26 and 18 respectively: ” 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.” and “In
addition, the
Trustee has no right to visit the premises of any subcustodian for the
purposes of examining the Trust’s gold or any records
maintained by the subcustodian, and no subcustodian is obligated to cooperate
in any
review the Trustee may wish to conduct of the facilities, procedures, records
or creditworthiness of such subcustodian.”
The
audit test was performed to the standard of ‘reasonable
assurance’. Piecing these assertions together it could be
possible for subcustodians to provide incorrect information, either
negligently or willfully, to the Custodian concerning the physical gold
quantity or quality. If
the incorrect information came to the knowledge of the Custodian then they
would issue Baskets. Regardless the Trust is unable to visit the
premises and examine the Trust’s gold or any records maintained by the
subcustodians. As a result, the paper instrument would inaccurately
represent the represented underlying physical bullion and the error would
most likely not be discoverable.
INVESTMENT
IN GOLD VERSUS GOLD
In the
10-K on page F-3 SPDR Gold Trust asserts an “Investment in Gold, at
cost” of $16,878,554,000. The term ‘investment in
gold’ is used in multiple places throughout the 10-K. This is
contrasted with other terms such as ‘Proceeds from sales of
gold’. This raises the issue of whether gold and investment in
gold are synonymous terms?
In
accordance with International Accounting Standard 1, The Bank for International Settlement’s Annual Report,
under Accounting policies footnote 14, treats Gold as a financial instrument.
Under Notes to the financial statements part 5 the Bank is extremely
careful to distinguish ‘total gold holdings’ as being comprised
of ‘gold investment assets’ and ‘gold and gold deposit
banking assets’.
In
GLD’s case, the financial statements make a significant distinction
between ‘investment in gold’ and ‘gold’. This
is odd considering most companies do not make such a distinction between
similar financial instruments such as ‘dollars’ and
‘investment in dollars’ or ‘euros’ and
‘investments in euros’.
Also
odd is the lack of transparency over what GLD’s ‘investment in
gold’ is comprised of. Is the phrase ‘investment in
gold’ broader, narrower or completely different from the term
‘gold’? For example, can a COMEX futures contract,
warehouse receipt or other similar OTC derivative fall under
‘investment in gold’? The term gold is well defined
as a chemical element with the symbol Au and atomic
number 79. Obviously, a warehouse receipt for gold is not gold
unless the receipt is made of the chemical element of atomic number 79.
Mr.
Turk addressed this particular issue and concluded, “If GLD declared
its asset to be “Gold”, the fund’s auditor would have to
substantiate that the gold really exists, which GLD of course cannot do
because of the inability to audit or even inspect gold stored in
subcustodians and sub-subcustodians, which is a risk noted in the
prospectus.”
Because
the Trust does have some gold in their vault the auditors are most likely
satisfied to a ‘reasonable assurance’ concerning the rest of the
gold.
CONCLUSION
GLD
ETF Trust supposedly holds more than 1,000 tons of gold. That amount is
surpassed only by the United States, Germany, IMF, France, Italy and
Switzerland; assuming they have the gold they claim. Under the GLD prospectus and
latest 10-K it appears that the Trust neither needs to own actual physical
gold that constitutes atomic number 79 nor allow their auditors to see and
touch the undefined ‘investment in gold’. I agree
with the reader who asserted that ‘it’s hard to imagine they
[auditors] didn’t at least send someone to the premises of the
Custodian to have a quick peep’. In other words, ‘Just trust us, the gold is
there.’ But why believe them?
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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