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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 skeptical 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 mediocre 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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