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Recently Adam
Hamilton, CPA turned newsletter writer, wrote about conspiracy theories involving the huge
SPDR Gold ETF, GLD. We think Mr. Hamilton is quite smart
but often he gets bogged down in verbose details just like we do. In any
case, he lays out a very strong case for why GLD (and by extension other
ETFs) are legitimate holders of metal. That hasn’t stopped some
conspiracists such as Jeff Nielson from responding that Even Gold Experts
[are] Fooled by Bullion-ETF’s. Unfortunately,
Mr. Nielson’s arguments are vapid and one-dimensional: “do not
buy GLD or SLV unless you trust bankers”. We would suggest that anybody
who is convinced by this line of “reasoning” should also not have
bank or brokerage accounts, mortgages, credit cards, insurance policies,
stocks or bonds. They should also stay away from any object that is sharp,
heavy or capable of launching projectiles at a high rate of speed.
Normally.
we’d tell you to go read both of these dueling GLD conspiracy articles.
But in this case, why bother? It turns out that hidden within the several
thousand words written by Mr. Hamilton, he reveals the only thing that
actually matters:
Provocatively,
GLD does actually have third-party audits of its physical gold despite
conspiracy theorists’ rants to the contrary. This ought to be
really embarrassing to the conspiracy theorists, as it proves they just
parrot old rumors rather than doing original research on their own. GLD
hires Inspectorate, a venerable commodities-testing and inspection
company founded in 1927. Each year it performs one complete
physical-bar count and a second random-sample count at a different
date. It certifies the results.
In tennis, this
is what we call game, set and match. Why Mr. Hamilton buries this information
deep in his anti-conspiracy theory rant is puzzling. Frankly, we
weren’t aware that GLD (actually, GLD’s sponsor) has recently
hired a firm separate from GLD’s external auditors to perform a
complete physical count and reconciliation of the gold bullion held by
the SPDR Gold Trust. We suspect this additional bar count was specified to
put the conspiracy theories about GLD to bed once and for all. And that it does.
In fact, if after reviewing the Inspectorate
certificate [PDF], somebody still claims that GLD does not
hold the gold that it says it does, that person is being disingenuous at best
and a downright liar at worst. Exceptions can be made for those who do not
trust bankers, but only if they don’t have bank or brokerage accounts,
mortgages, credit cards, insurance policies, stocks or bonds.
We know some of
you are not going to click the link to the Inspectorate
certificate [PDF], so we’ll provide the relevant
excerpts here.
21st October 2009
Dear Sirs,
Re: Count of Gold
Bullion
World Gold Trust
Services have engaged Inspectorate International Ltd to conduct two counts
each year of the gold bullion stock held on behalf of the SPDR Gold Trust
(the “Trust”) at the vaults of HSBC Bank USA National Association
(the “Custodian”) in London. A complete bar count is conducted
once per year and coincides with the Trust’s financial year end at 30th
September. The second count is a random sample count and conducted at a date
which falls within the same financial year.
It is with
pleasure we submit our report to the Trust covering our count for the record
date as of 10th July 2009.
In accordance
with the agreed procedures, we hereby report the following:
Name of
Account: Bank of New York Mellon - SPDR Gold Trust
Bullion Account
No: 18984
Material:
London Good Delivery Gold Bars
Location:
London Vaults of HSBC Bank USA National Association
Gold
Inventory: As per the records of the Custodian at close of business
10th July 2009 this account held title to 89,797 Lond Good Delivery, large
Gold Bars of a purity between 99.50% and 99.99% and a weight of
36,015,108.723 fine troy ounces of gold.
Description of
Activity: We performed a full count of 89,797 bars of gold, based upon
the gold inventory as at 10th July 2009, between 15th July and 20th October
2009 at the Custodian’s premises and performed certain procedures
including but not limited to the following:
- The
gold inventory records of Bank of New York Mellon were reconciled to the
records of the Custodian.
- Each
individual gold bar in the gold count was agreed to the records of the
Custodian as being held in the name of the above referenced account. The bar
number, refiner brand and purity of each bar were checked against the records
of the Custodian.
- A
statistically random sample of the gold bars counted were weighed and the
weight checked against the Custodian’s records.
- The
records of the Custodian at 10th July 2009 were reconciled to the records of
the Custodian at 20th October 2009 being the last day of the gold count.
Anomalies:
The anomalies identified on the gold count for 10th July 2009 are as follows;
We’re not
going to detail all the anomalies, go read the certificate if you are
interested. But to summarize, basically there were about 300 bars with the
wrong refiner recorded in the Custodian’s records and about 100 bars
had a mistake in the bar number (most typically an incorrect prefix letter).
While having 400 recording errors out of 90,000 bars is somewhat a sloppy
percentage, importantly there were no missing bars or bar weight
discrepancies. A normal bar inventory would focus on just the bar count and
total weight, not a 100% inspection of the Custodian records, so these errors
are likely to have accumulated over a period of time. Future Inspectorate
audits should result in fewer bar count anomalies.
We’d like
to end things here but two observations by Mr. Nielson are still stuck in our
craw. First, we have:
All that has ever
been established is that the bullion banks have enough bullion to cover
either their short positions or the custodian agreements. If these bankers
had to choose between defaulting on their
own short positions – which would permanently discredit
them in commodity markets, or defaulting on their custodian agreements (and
pay a small fine), which course of action would these bankers be most likely
to take?
This of course is
bass-ackwards. Even if it were true that the bullion banks hold massive naked short
positions in gold and silver, it would be far less damaging for them to
default on such derivatives than “defaulting on their custodial
agreements”. Custodial fraud is not only about the worst thing for a
banker’s (or anybody else’s) reputation, it is also a very
serious criminal matter. A custodian who does not adequately protect his or
her clients’ assets will literally never work in that town again.
Therefore, the “course of action” that the bankers will always
take is to default on the alleged naked short derivative position while
protecting the custodial relationship at all costs.
Next, Mr. Nielson
brings up the bugaboo of the fabled Morgan Stanley settlement:
What other
possible reason could the gold miners who founded GLD have for choosing the
bullion-bank shorts as “custodians” for their gold? Is it because
these banks represented the safest storage option for GLD unit-holders?
Hardly. These same bankers have a long history of bullion fraud. The most
recent example of this was when Morgan Stanley recently paid millions in
damages for simply pretending to buy bullion – on behalf of its own
clients (see “Morgan Stanley pays damages for Precious Metals
Fraud”).
Our problem with
the “fraud” involving Morgan Stanley is that these were merely
unproven allegations by the plaintiffs. Morgan Stanley provided evidence to
both the plaintiffs and the judge that precious metals were in fact purchased
on behalf of the plaintiffs. In the end, Morgan Stanley settled but did not
pay either a fine or damages. We believe the settlement was essentially an
admission that Morgan Stanley should have provided additional disclosure to
its unsophisticated clients about the available bullion storage options.
These unsophisticated clients (the plaintiffs) invariably chose unallocated
storage even though they apparently wanted allocated, segregated ownership.
Anybody who would like to check the details of the settlement can do so here [PDF]. In
any case, the Morgan Stanley settlement is neither “bullion
fraud” nor is it “pretending to buy bullion” and moreover bankers
do not have a “long history of bullion fraud”. Any claims
otherwise need to be accompanied by documented proof.
In
conclusion, the question of GLD gold holdings has now been answered once and
for all. Time to move on to the next conspiracy theory.
Tom Szabo
Silveraxis.com
Also
by Tom
Szabo
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