Is GLD Really As Good As Gold?

Not even close.

Here is an article from Forbes on GLD that needs to be read by anyone who “invests” in GLD thinking they own physical gold. The fact is they “own” the paper price of physical gold bullion. What the Hell is that? Why don’t they own the metal? Simply, you cannot own something that you do not possess. Only Primary Dealers like JP Morgan can possess the gold in GLD. In fact, the best thing a non-primary dealer can own is the price performance of the current bullion pricing mechanism that is based on supply comprised of mostly paper commitments to deliver physical at some future date. These commitments represent over 90% of the supply that simply does not exist.

So, the current gold price reflects an imaginary supply that is 10 to 100 times larger than the actual supply of real physical gold than can be touched. So owning GLD is owning a derivative of a derivative of physical gold. That’s right, owners of GLD own a 2nd order derivative of gold. Now that sounds appealing doesn’t it. It gets worse. When you choose to own GLD you waive your any rights to recovery from theft or fraud. Do you think there is any fraud out there? Think the CFTC and the SEC are keeping the game honest? Yeah right. The argument that this fund is highly regulated is a joke, the regulators have been asleep at the switch in the best case scenario and complicit in fraud in the worst case. Just look at their sorry ass performance from Madoff to Lehman to MF Global to Countrywide to Bank of America to….

At best, owning GLD is owning the price suppression GLD and other paper gold schemes for physical gold. The real price of gold, RPG-Freegold, is waiting for the investors in these products to be fleeced by the fraudsters. When the paper gold supply is revealed to be a figment of imagination, and when people choose to no longer own imaginary gold, the real gold price representing real physical gold will emerge. The demand for GLD will go to zero, along with its price. The same will happen for Comex gold futures contracts.

GLD is for ignorant people who want to own gold. GLD is for traders who are now nothing more than gamblers. Gamblers can make a decent living if they know what their are doing. But, gamblers who aren’t good at what they do get their asses handed to them. Most of all GLD has no future and is for people who wish to lose everything.

 

11/15/2011 @ 9:35PM |24,781 views

Is GLD Really As Good As Gold?

 

Gold bars in Fort Knox, many chose the GLD ETF as an alternative to physical gold – reddogreport.com

In 2004, the launch of the SPDR Gold Trust exchange-traded fund, under ticker symbol GLD, leveled the playing field of gold investing by allowing for a less expensive option than buying the physical metal.  Ever since, many have come to equate GLD with actually owning gold, but the reality is a bit more nuanced.

GLD has grown to become the second-largest exchange-traded fund by assets, valued at $72.4 billion and backed by 40.8 million ounces of physical gold.  The subject of much fascination, GLD has also been targeted by skeptics who question the ETF’s secretive methods and even doubt it holds all the gold in HSBC’s vault in London.  Jason Toussaint, the managing director and principal executive officer of World Gold Trust Services, spoke to Forbes and sought to dispel rumors by explaining how GLD works.

 

 

Since GLD debuted on Nov. 12, 2004, it has risen more than 280% to over $170 a share.  “The whole thesis [behind GLD] was creating an efficient market for gold trading,” explained Toussaint.  The price discovery mechanism wasn’t working effectively: storage, insurance, and transport costs and logistics problems prevented efficient markets.  “The analog [to GLD] is that to buy one share of GE I don’t have to go to their sales guy, I press a button on my computer and I own it,” Toussaint said.

Investors, then, are drawn to GLD because it allows them to “own” physical metal.  Suzanne Hutchins, for example, Newton’s investment manager for global funds and head of their real return investment team (which is part of BNY Mellon), said they like gold as an inflation hedge in the face of currency debasement.  She sees GLD as one of the ways to gain exposure to the yellow metal and likes it because it is physically backed.  She told Forbes her team’s been to the vault and seen the actual bars.

But how does GLD work? It’s actually a lot more complicated than simply allowing investors to “own” gold.  GLD is a trust, sponsored by the World Gold Council (through World Gold Trust Services), which oversees the performance of the trustee, which is Bank of New York Mellon (note Hutchins works for the trustee).

The trust seeks to reflect the price performance of gold bullion by holding gold bars and issuing shares backed by their holdings of physical metal.  The gold bars are held in HSBC’s vault in London, and shares are sold in baskets of 100,000.  The ETF is marketed by State Street.  Where most investors are confused about GLD, though, is about redemption.

Even though GLD is “physically backed,” ordinary investors can’t just go to London and redeem their bullion.  Only “authorized participants” are allowed to create or redeem shares.  Authorized participants are registered broker-dealers or other securities market participants which have entered into agreements with the trustee and sponsor (these include major Wall Street names like Citi, Goldman Sachs, Morgan Stanley, JPMorgan Chase, and Merrill Lynch-Bank of America, among others), allowing them to  deposit either gold or shares in exchange for the other at unallocated accounts until the operation is completed.

Regular shareholders have no rights of redemption and the gold is not required to be insured by the Trust, which is not liable for loss, damage, theft, nor fraud.  Shares are bought in the open market, only after Authorized Participants decide to place or sell them.  Therefore a retail investors doesn’t actually “own” gold, but an asset that is backed by gold and represents a certain quantity of the yellow metal.

Skeptics have raised doubts over the trust’s management of its physical gold, with questions over how much is actually held.  HSBC, the custodian, is very secretive regarding its vault.  Earlier this year, CNBC’s Bob Pisani was allowed to see the vault only after surrendering his cell phone and taken in a van with blacked out windows to an undisclosed location.  Once in the vault, Pisani held up a gold bar and explained they were all numbered and registered.  Astutely, ZeroHedge noted the bar Pisani held up was missing from the current bar list, fueling further speculation and skepticism.

Toussaint defends GLD by noting they are regulated by the SEC.  “We are filing 10-Qs [quarterly reports with the SEC], on a regular basis,” he said, then added “I also think the world’s largest hedge fund managers take their due diligence seriously,” referring to investments in GLD by world-renowned hedge fund managers like John Paulson and George Soros, among others.

Another major criticism of GLD, which pertains to the whole ETF industry, is that it distorts prices in underlying markets by offering “on-demand liquidity to investors while they are in some cases based on much less liquid underlying assets,” according to a report by the Financial Stability Board.

“GLD has professionalized gold investment and positioned gold within the menu of viable asset classes,” responds Toussaint.  “Gold ETFs have expanded the investor base and the overall market,” explained Toussaint, “but they still represent less than 10% of total demand for gold, I don’t think it has affected price in the market.”

Bob Pisani at HSBC’s gold vault where GLD’s metal is kept – goldsilver.com

Global gold markets are now “extremely price effective” and “hugely diversified,” as the market feeds on several sources of demand, not just speculative investment demand.  Not only is gold a financial asset, it is also decorative, which becomes all the more important as discretionary incomes rise in India, China, and elsewhere in the developing world, where physical demand runs rampant.  “How many people buy a convertible bond and wear it around their neck, or use a stock certificate as adornment? There is no other asset class like gold,” says Toussaint.  Central bank diversification, another major source of demand, has taken a new role as central banks become net buyers of the yellow metal, according to a study by the World Gold Council.

It is difficult to pin down the exact reasons behind gold’s 10-year bull run, but the reality is that interest in gold is as old as money itself.  Be it an inflation hedge, a bet on an alternate monetary asset, or a move into a safe haven, GLD is one of the most popular ways to gain exposure to the yellow metal.

Owning GLD is clearly not the same as owning physical gold, it just serves different purposes.  GLD allows investors to play the physical metal without facing the underlying costs and logistical problems, but it doesn’t entitle one to an actual amount of gold. GLD helped make the market more democratic, to a certain extent, but also injected liquidity, thus fueling further price volatility.  No matter what Toussaint  or anyone else says, there will always be skeptics, but as long as gold maintains its trajectory, GLD will continue to thrive.

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