Everybody Out of the Gold Pool!

Although I'm not a lifeguard, I can tell a blue sky from a thunderstorm.

Following a series of astonishing revelations over recent weeks, which have further demolished common misperceptions regarding the structure of the global gold and silver markets, you don't have to carry a whistle or dab zinc on your nose to know that investors need to climb out of the unallocated gold pool.

Scores of investors attempt to procure gold and silver exposure through unallocated bullion holdings, often referred to as pooled accounts. Touting lower storage or administrative fees than allocated accounts, these unallocated holdings are generally presented as similarly secure, with the major difference being that investors stake claim merely to a given quantity of bullion, rather than specific numbered pieces (as in allocated accounts).

Check for water before you dive in
Here's where the storm clouds begin to appear. Back in 2008, around the same time that I was documenting a palpable shortage of physical supply in the marketplace, investor Harvey Organ's son, Lenny, noticed a huge discrepancy between spot prices for silver and the substantial premiums being charged for physical bullion at the time.

Concerned for his family's bullion holdings, and despite reassurance from his father that the metal had to be there, Lenny sought access to the main bullion vault of ScotiaMocatta, a division of Bank of Nova Scotia (NYSE: BNS  ) . On Sept. 3, 2008, Lenny and his bullion broker were reportedly granted entry into the only official bullion bank storage facility in Canada.

According to Lenny, the unallocated portion of the vault's holdings was minimal, permitting a simple visual inventory that suggests a present-day market value beneath $100 million. In an interview with King World News, Harvey and Lenny Organ last week revealed that this was why Harvey had been invited to testify at last month's landmark hearings in Washington, D.C., conducted by the Commodity Futures Trading Commission (CFTC).

Empty vaults mean empty promises
Digging further into this breaking story, I spoke with Adrian Douglas, the GATA (Gold Antitrust Action Committee) board member who assisted Harvey Organ at the CFTC hearing. Douglas explained:

It highlights that unallocated isn't what most people think it is. I think most people would be shocked. They're buying this gold and silver expecting it to be a low-risk investment, when in fact it's a high-risk investment. It's an unsecured investment, backed only by the assets of the bank.

The stinging irony here, of course, is that investors seek out precious-metals exposure precisely to escape the sorts of shenanigans that have proven so very prevalent among other sorts of financial instruments over the past few years. Douglas continued:

This is not to say that all unallocated storage is like this, but investors need to do their due diligence and find out. Otherwise, investors are essentially making interest-free loans to the bank, with which they might buy gold and silver if they see fit. Actually, it's a negative interest rate, because you have to pay them so-called storage and insurance fees.

A troy ounce of context
The presumed sanctity of unallocated gold and silver holdings was called into serious question last month, when commodity consultant Jeffrey Christian insinuated that supply in the over-the-counter (OTC) metals market is leveraged 100-to-1 over the actual physical supply of underlying metal (see the first link above).

At the same hearing, GATA chairman Bill Murphy presented allegations of gold and silver price-suppression by bullion banks such as JPMorgan Chase (NYSE: JPM  ) and HSBC (NYSE: HBC  ) . Revelations from London metals trader (turned whistleblower) Andrew Maguire heaped additional corroboration onto evidence that GATA has been building for more than a decade. As a result, I urged investors to give careful consideration to their choice of bullion investment vehicles, and pointed out that the custodians of popular proxies like the SPDR Gold Trust (NYSE: GLD  ) and the iShares Silver Trust (NYSE: SLV  ) are the very same bullion banks alleged by GATA to maintain massive short positions on the COMEX.

Keep your head above water
If you hold unallocated gold or silver bullion certificates issued by one of the major bullion banks, I urge you to consider that this segment of the market may collectively lack an adequate physical supply of metal to satisfy claims, in the event that any significant proportion of investors tender their paper certificates for physical bullion.

If the alleged leverage pervading the over-the-counter (OTC) markets and the futures exchanges is ground to a halt by increasing physical demand, the scarcity of supply will become more pronounced still. Just as the banks essentially wagered that mortgage values would never decline, it seems that a similarly dangerous wager may yet be on the table: a bet that gold and silver investors will never call the bluff of a massive paper-based shell game.

If you're swimming in an unallocated bullion pool, I recommend climbing out before lightning strikes the water. For investors seeking bullion exposure through vehicles that do explicitly state the nature of their holdings, in ways that alleviate these sorts of concerns, I continue to suggest Central Fund of Canada (AMEX: CEF  ) and the Sprott Physical Gold Trust ETV (NYSE: PHYS  ) . If you have any concerns or questions relating to this developing story, please post them in the comments section below, or follow my Motley Fool CAPS blog for ongoing community discussion.

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at CAPS lists 52 potential investments, and you'll find Christopher's comments on many of them.

Fool contributor Christopher Barker carries a silver coin which reads: "Honest value never fails." He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Central Fund of Canada. The Bank Of Nova Scotia is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool's disclosure policy is 0.999 pure.


Read/Post Comments (47) | Recommend This Article (86)

Comments from our Foolish Readers

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  • Report this Comment On April 13, 2010, at 6:37 PM, ndfaninsb wrote:

    Looks like this all could cause an explosion in prices for silver. Buy physical silver and silver stocks. CDE, SVM, SLW, PAAS.

  • Report this Comment On April 13, 2010, at 6:38 PM, ndfaninsb wrote:

    Silver is gonna explode. Buy Physical bullion and silver miners. CDE,SLW,PAAS,SVM.

  • Report this Comment On April 13, 2010, at 8:20 PM, XMFSinchiruna wrote:

    If you haven't already read the first article of this series by clicking on the link at the beginning of the above article, then please permit me to post it here for your convenience.

    The two pieces necessarily belong together as my ongoing interpretation of this developing story.

    http://www.fool.com/investing/general/2010/04/05/is-your-saf...

    ndfaninsd,

    I own them all. :)

  • Report this Comment On April 13, 2010, at 9:32 PM, TheDumbMoney wrote:

    I know I'm a poor fool with a bad track record and whatnot, but, as I felt about the prior article, I humbly think this article fails to take the reasoning to the next step: If gold and silver are highly leveraged, because what is being traded does not match what actually exists, then this has almost certainly inflated the price of gold and silver. Don't you think? What is the counter-argument? It is: once people realize how little gold and silver there REALLY is, they'll flock to the stocks/ETFs that represent actual gold/silver, thereby pushing their prices even higher. Right? Is that why you still own what you own what you own? I know I'm sort of a perma-skeptic on bullion, but I'm just not sure I buy it. In non-inflamatory terms, I fear/think: 1) if that were true, then why was bullion so much cheaper BEFORE the creation and/or popularity of the GLDs of the world?; 2) the money will be gone if these ETFs collapse, so it won't be going into CEF, etc.; 3) investors/ speculators may shy from bullion entirely with what money they do have left and demand may collapse unreasonably; 4) I don't see there being a ton of people holding off on buying GLD, and just waiting for the market to collapse; 5) finally, I also think you have to make a distinction between miners, on the one hand, and on the other a fund/bank holding actual bullion; that is because the value of the miners' businesses may now be at least partially tied (if not largely tied) to the believed (maybe mythical) future claims of gold/silver as reflected in these leveraged bullion banks, meaning the miners may be set up for a large fall as well. Anyway, at the very least, the article does not lay out your logic on why the hard miners and hard holders of bullion are still attractive in light of what you are writing about.

  • Report this Comment On April 13, 2010, at 10:21 PM, XMFSinchiruna wrote:

    dumberthanafool,

    I suspect you haven't reviewed my response to your comments on the previous article, which I will repost a portion of below:

    http://www.fool.com/investing/general/2010/04/05/is-your-saf...

    The following reply was in response to your position that a delevering market for paper gold and silver could have the same impact on prices as you claimed the delevering of the mortgage industry had on housing prices:

    "I think you might want to revisit the principles of supply and demand. Housing prices did not decline as a direct result of the deleveraging event in mortgage securitization derivative instruments... it was the other way around. A massive oversupply of houses triggered a reversal of the housing market's longstanding upward price trajectory, which in turn triggered the ongoing derivative deleveraging crisis.

    Here is the important distinction: At no time were participants in the housing market deceived into thinking that the physical supply of actual houses in the U.S. was orders of magnitude greater than it actually was.

    In the case of gold and silver, the only supply which has been manufactured out of thin air is a paper supply that has no basis in reality. To understand that physical gold and silver are impervious to such monstrous inventions of the bankers is to understand the nature of gold and silver as the only remaining forms of honest, debt-free money in a world of heavily impaired fiat currencies.

    We will have a parting of two completely different classes of investment vehicles that are presently conflated. Investors who may not understand the distinctions between physical metal and leveraged metal derivatives today will certainly understand them soon enough, and all that investment capital that thinks it's parked in gold and silver will be deployed in search of real physical.

    And so, it's plain to see that even assuming a fixed level of demand for precious metals, a delevering of the paper market will send massive demand chasing a minute physical supply ... sending prices sharply higher.

    Fool on!"

    As for your suggestion that somehow the recent revelations and resulting expectations for impacts on metal prices may already be somehow priced into mining shares, I remind you that this story broke just during the past month.

    And referring to your final sentence above, I saw no need to construct such an explicit argument for readers with an understanding of supply and demand. The impact upon prices for physical gold and silver, and correlatively the shares of miners and holders of truly unencumbered physical bullion, from a delevering of the OTC market and discovery of any malfeasance within the unallocated segment of the market, is painfully obvious.

  • Report this Comment On April 13, 2010, at 11:19 PM, TheDumbMoney wrote:

    1) OK, so in answer to my question here, you do in fact think the demand will rush into the real holders of bullion, an option I presented above. I quite understand the principle of supply and demand, I just think you misunderstand the reality of what the basis is the so-called demand in bullion. The demand is not for gold. The demand is not for silver. The demand is not for Vanadium or Platinum. The demand is for SAFETY, as evidenced in your own reply to my post, which evidences a certain fear of "heavily impaired fiat currencies." In my opinion, deleveraging will shatter the current channelling of that demand for safety (currently directed towards bullion) away from bullion, at least temporarily, and probably violently.

    2) Housing deleveraging. As you say (and I agree), housing first declined, which caused the deleveraging event in mortgage securitization derivative instruments, it triggered it. But then, what you miss (or don't say) is that the deleveraging event caused housing to decline much, much, much farther. That is because when demand for securities went away, nobody could get loans. (Absurd demand for securities drove the market for buyers of homes, because it was the only thing that allowed many to qualify for loans.) So let me be clear that when I analogize the mortgage market to the current gold market, the type of demand in the mortgage market that I am referring to is NOT the demand by home buyers for homes. Your comment, "At no time were participants in the housing market deceived into thinking that the physical supply of actual houses in the U.S. was orders of magnitude greater than it actually was" is therefore nonsensical to me (and I'll re-write it below). Rather, the demand I am talking about is the demand amongst buyers of the mortgage securities for these securities. And in fact, these institutions WERE deceived into thinking that the "physical supply of actual [viable, long-term performing loans] was orders of magnitude greater than it actually was." This is precisely the situation in which buyers of GLD, who represent by analogue, let me say it again -- the securities buyers and NOT the homeowners -- may find themselves in.

    3) I also think anybody who has started to excessively use the term "fiat currency," as a pejorative term, but has only started to do this in the last year or two, is likely excessively bearish on the concept of "fiat currencies."

    3) Finally, I don't know if I'm right, and in the end the markets will tell us who was. But in my opinion, when anyone actually says "it's plain to see" about ANY of this stuff, people should run in the other direction. As to whether I'm a Fool who doesn't understand supply and demand, we'll let readers of both our posts be the judge of that.

  • Report this Comment On April 13, 2010, at 11:42 PM, XMFSinchiruna wrote:

    dumberthanafool,

    You have much to learn about gold and silver.

    If you think that GLD buying does not represent demand for gold, then we have nothing further to discuss.

    Your analogy is bunk. Buyers of GLD think they're buying straightforward exposure to gold, and not a securitized derivative as the mortgage investors knew they were buying.

    My understanding of gold and silver markets runs deep. If you would like to learn, I am happy to teach. But if you seek only to maintain a slipping grasp upon some tenuous bearish outlook for gold and silver prices, then I may not be able to help you. I have presented my evidence for higher gold and silver prices through dozens and dozens of publiched articles here at the Fool, and that compiled research is freely available for any who wish explore these markets in a more comprehensive fashion.

    I am happy to let readers draw their own conclusions from our conversation as it stands, as I see little value in continuing this further.

  • Report this Comment On April 14, 2010, at 1:23 AM, SnapDave wrote:

    The difference is much simpler than all that. Gold and silver are not in a bubble as housing was. In fact, many of us would say silver is grossly underpriced.

    Let me play a little devils' advocate for a second though re: GLD and SLV. If, in fact, there is no metal there they are still backed by the banks. That kind of does away with the security aspect of PM purchases but may be good enough for someone who simply wants to bet on price increases. John Paulson and George Soros both have large positions in GLD. So they must think it's safe. Maybe Paulson was a one hit wonder but, as much as I hate the old *$(*#%!, Soros is no dummy. That has to be worth something. On the other hand we'll never know if he is warned and yanks all his money before the whole thing comes crashing down.

    Against GLD/SLV is that if there is no real metal then you are buying something without contributing to demand for the underlying and therefor not contributing to helping the price go up. Besides they count as short term capital gains for tax puposes regardless of how long you hold them. Then they muddy the water with expense sales that give you a headache until you figure out they have no tax implications.

  • Report this Comment On April 14, 2010, at 1:26 AM, TheDumbMoney wrote:

    Fair enough. I certainly feel the same, there is nothing more substantive to say. Do feel free to hold me up an as exemplar of fiat currency hubris and gold-flumoxed confusion and whatever else in some future article, oh sensei, if and when gold goes permanently through the roof. I promise I won't be offended. But expect to hear from me if it goes in the can, either before or after you write that article. Also, thank you for your second explanation as to why my analogy was bunk; it was, though quite brief, slightly better than your first attempt.

  • Report this Comment On April 14, 2010, at 2:00 AM, TheDumbMoney wrote:

    I really don't mean to be entirely dismissive, not that it matters. I do think you make some very valid points: people should be aware when these things are not backed by actual physical assets. I agree that many, many people who 'invest' in these things are not aware of that. And I'm aware of your long history with the metals. But your article before this one was simply too feverish, as opposed to journalistic, for my tastes, which is what got this whole thing started for me. Go in peace and good luck to you.

  • Report this Comment On April 14, 2010, at 2:47 AM, SnapDave wrote:

    I'd have to disagree that the housing bust was due to oversupply of houses. At it's most fundamental level, personal incomes going up say 5%/year can't keep taking on new mortgages when home prices are going up 10%/year. Oversupply of credit, not homes did this.

    People are not taking on $99 of debt to purchase $100 of gold. So the comparison with houses is apples to hand granades.

  • Report this Comment On April 14, 2010, at 3:14 AM, SnapDave wrote:

    I'd have to disagree that the housing bust was due to oversupply of houses. At it's most fundamental level, personal incomes going up say 5%/year can't keep taking on new mortgages when home prices are going up 10%/year. Oversupply of credit, not homes did this.

    People are not taking on $99 of debt to purchase $100 of gold. So the comparison with houses is apples to hand granades.

  • Report this Comment On April 14, 2010, at 6:15 AM, XMFSinchiruna wrote:

    SnapDave,

    If we could, can we keep the discussion focused upon gold and silver and the series of very complex developments affecting these markets? I'll be more than happy to discuss the roots of the housing crisis in another forum. The significance of this particular breaking news, and the degree of persistent media silence on the topic, renders this issue one that I consider deserving of considerable and well-focused discussion.

    Thank you for permitting me to steer the discussion back to the case at hand. :)

    Sinch

  • Report this Comment On April 14, 2010, at 7:00 AM, aristochat wrote:

    I have been thinking about this over the last week and I conclude that if it is true that for every 1 ounce of gold there is 500 pieces of paper, then buying GLD or any other ETF that is not 100% physical gold is no better than equivalent of buying a commodity backed currency, except that the currency carries an implied government guarantee. In fact this dilusion of value is outragious, since the whole point of gold is as a store of value.

    If this is the case, then like a fiat currency GLD value is simply a question of confidence, "dont worry George S is holding it" etc. As long as nobody decides to "goldatize" these 499 "promises to pay" paper, it is no problem. If confidence is lost then of course people are going to demand the physical stuff, which will take it off the table altogether, pushing the price even higher and forcing more promisary notes to be issued, making the promise to pay at GLD more risky. GLD might look decidedly shacky and if you are still in the building well, you might loose all of that "safe" investment. It will feel like a run on the bank as this market rigging/risky paper scandal begins to unfold and there is the very real risk of all investors heading for the exit signs in a blind panic out of the ETFs such as GLD and into physical backed ones, pushing their value higher if not into the stratosphere.

    So... is it time to short GLD and buy SGBS.L?

  • Report this Comment On April 14, 2010, at 7:09 AM, aristochat wrote:

    I have been thinking about this over the last week and I conclude that if it is true that for every 1 ounce of gold there is 100 pieces of paper, then buying GLD or any other ETF that is not 100% physical gold is no better than equivalent of buying a commodity backed currency, except that the currency carries an implied government guarantee. In fact this dilusion of value is outragious, since the whole point of gold is as a store of value.

    If this is the case, then like a fiat currency GLD value is simply a question of confidence, "dont worry George S is holding it" etc. As long as nobody decides to "goldatize" these 499 "promises to pay" paper, it is no problem. If confidence is lost then of course people are going to demand the physical stuff, which will take it off the table altogether, pushing the price even higher and forcing more promisary notes to be issued, making the promise to pay at GLD more risky. GLD might look decidedly shacky and if you are still in the building well, you might loose all of that "safe" investment. It will feel like a run on the bank as this market rigging/risky paper scandal begins to unfold and there is the very real risk of all investors heading for the exit signs in a blind panic out of the ETFs such as GLD and into physical backed ones, pushing their value higher if not into the stratosphere.

    So... is it time to short GLD and buy SGBS.L?

  • Report this Comment On April 14, 2010, at 7:10 AM, aristochat wrote:

    ..sorry I dont know how you remove duplicate posts, I meant 100 pieces of paper not 500 :-s

  • Report this Comment On April 14, 2010, at 7:27 AM, XMFSinchiruna wrote:

    aristochat,

    A few important points to consider:

    I have seen no solid evidence that GLD is absent physical backing. In all likelihood, at least a significant portion of the reported holdings are sitting there in the vault. The question that arises when you have a custodian who allegedly holds one of two hugely manipulative, concentrated short positions on the market is to what degree might those physical holdings be encumbered by paper derivatives, swaps, or other complex arrangements that would represent competing claims on the same physical supply?

    Now, these key bullion banks are permitted to maintain massive short positions only because they are presented as hedges for offsetting long positions. The potential exists, in my opinion, for such institutions to use ETF holdings as their long-side counterpart for the shorts. Under that scenario, every share of a bullion bank ETF empowers the banks' ability to keep prices of the metal contained through these massive manipulative short positions.

    Aside from using the holdings as long-side collateral, the incentive may also exist to leverage some portion of the holdings through the origination of OTC derivatives. It gives them a pool to play with in the event that their paper games ever resulted in a call for physical, with the presumption under that scenario being that any physical calls would be containable and that ETF holdings could then be replenished in time.

    The degree of leverage in the gold OTC markets revealed by Jeffrey Christian was 100:1. I have seen no claim of 500:1 leverage.

    So, again, I have seen no direct evidence that GLD or SLV are absent physical backing. I merely pointed out that the recent revelations about the degree of leverage pervading these markets, as allegedly dominated by the very custodians in question, raises significant red flags for investors to carefully consider.

  • Report this Comment On April 14, 2010, at 9:58 AM, aristochat wrote:

    Hello TMFSinchiruna

    You clearly have a much better understanding of the market mechanics.

    The recent revelations about the degree of leverage pervading these markets, as allegedly dominated by the very custodians in question, does raise significant red flags for investors like me, who simply want it as a store of wealth..

    If I look at the bar list on SPDR today it states that:

    Total Allocated Bar Count: 91,439

    Total Unallocated Balance: 132.850

    As a simple gold investor, to me SPDR holds 91,439 of gold and the rest (60%) is paper promises with a 1% chance of being redemmed if there is a mad panic by people like myself to keep the stuff at home because now it turns out that I cannot even trust gold. As a simple investor looking for a store of wealth holding an ETF that is not 100% allocated is a little better than holding the Danish crown which is backed by 25% gold and with the same chance of it being eroded by banking chinanigans or the mistrust of its users.

    Presumably if you are trading on the social barometer fof uncertainty, then playing SPDR maybe quite fine.

  • Report this Comment On April 14, 2010, at 1:51 PM, profittkr wrote:

    All an average Joe can say is Holy S*, then think how to profit from it.

    We're seeing lots of numbers on physical gold supply, ratio's, etc. Can you offer the same in regards to silver where leverage may be greater? Even more to the point, how can we put in direct orders to buy bullion ourselves..or is it too late for that? As this story breaks and existing 'owners' try to lay hands on their bullion, they will have dibs, and we'll be shut out? Thx.

  • Report this Comment On April 14, 2010, at 3:09 PM, fockewulf wrote:
  • Report this Comment On April 14, 2010, at 7:43 PM, mountain8 wrote:

    Two quick questions:

    1. How does the industrial use of gold and silver relate to this matter if at all?

    2. How does this all this relate to precious metal coins, collectibles not bullion?

    Note: I have a bunch of silver dimes, quarters etc which I expect to sell as soon as Obama's Inflation sets in well. Is that premise anywhere near valid?

    ($%&$ I asked three. Sorry.)

  • Report this Comment On April 14, 2010, at 9:02 PM, cslob wrote:

    Re: How does this relate to collectible precious metal coins?

    Not much for silver coins. a 90% silver quarter is worth $3.30 today in silver, but that is much lower than the cost of a "collectible" quarter which might be $50 to $5000.

    The same is true of gold but the economics are skewed. A 100 year old $20 coin has $1115 (0.9675 troy Oz) of gold value sells for only a 20% premium if it is a common date ("uncollectible?"), but rare-ish dates sell for $2000 to $20000.

    I collect (invest?) in commodity $20 gold coins in uncirculated (almost) condition. I have the underlying $1115 and a modest premium for rarity (20%). That premium could rise but more gold coins are 'found' than 'lost' these days so the rarity is not getting rarer.

  • Report this Comment On April 14, 2010, at 10:02 PM, ChrisGraley wrote:

    I'm no where near as up on this stuff as Sinch, but I can answer a few of these questions.

    I think I know where you are going dumberthanafool, but if you think this out a step farther, you may have your answer.

    Try to think about this like the reserve banking system. The ETF's know that not everyone is going to ask for their gold at the same time so they only keep a portion of their money in actual gold. This saves them fees for buying , storing, and selling gold as people buy and sell shares. This works fine until you get the equivalent of a bank run. At this point ETF's will scramble to convert their cash holdings into gold and drive up the price. The fact that there isn't enough gold to buy will mean that the funds that are faster have the only shot of staying in business. Gold prices will shoot up so fast, that everyone will demand physical delivery when the run starts. As for why buying gold that doesn't exist doesn't inflate the price, it does inflate the price once you realize that it doesn't exist. As long as the charade goes on though, you think that you have more gold than you actually have and that deflates the price. If I sell you 2 horses for $50 each and offer to keep them on my ranch, horses are worth $50 until you decide to show up on the ranch and collect your purchase. Once you realize when you show up that you really own just 1 horse, the value of horses goes up to $100. You can add to this the fact that JPM and GS are shorting more gold than than exists right now and they are dumping borrowed gold on the market and you soon learn that gold is extremely undervalued. As far as your other questions, 1) gold had to be more expensive before ETF's were practical. 2) See the explanation with the 2 horses above. 3) When bullion instantly gets more scarce, investors will flock toward it and not away. 4) The people buying GLD aren't looking for the market to collapse, they are looking for inflation. It's when inflation hits that it gets interesting. the ETF's hold more cash than gold and cash won't be able to buy as much gold when inflation hits. 5) When inflation goes up, a miners costs go up as well. Also remember how I said the big banks were dumping gold on the market? Here is how they do it. They take gold that rightfully belongs to someone else like the US government and they give it to a miner. The miner immediately sells it to make his current production higher. The miner agrees to pay back the bank the same amount of gold. Well when gold prices shoot through the roof, They are hampered by not being able to put as much gold on the market as they could have.

    mountain 8

    1) Gold doesn't have a ton of industrial uses and more gold continues to be created than consumed. Silver on the other hand is being consumed faster than it's being pulled out of the ground. In my opinion, Silver is grossly under-priced and is the better play even if you don't take that 1 fact into account.

    2) If we see 70's style inflation again, people will try to sell anything that they have of value. Your Silver coins have 2 values. 1) Melt value 2) Numismatic value. Melt value will rise with inflation, but numismatic value may drop if a lot of people sell. Most silver coins have a higher numismatic value than melt value, so you may lose money if you wait to sell into inflation.

  • Report this Comment On April 15, 2010, at 4:20 AM, sabretache wrote:

    Whilst I agree the underlying fundamentals of maybe 100X promises for every X of physical in the vaults, there remains a problem with the notion that 10% or more promise holders demanding delivery in exchange for paper, will cause a price explosion. The problem being - where will they have it delivered to?

    OK a proportion will go into personal safe's, under the bed, etc, but my guess is that the large part of it will simply be re-categorised as 'allocated' and remain with those same institutions - or at best be shuffled around between them. If so, there will certainly be upward pressure on price but, if the shananigans at the CFTC hearings are any guide - pressured as TPTB are to 'hold the line' at whatever (government underwritten??) cost - the banksters will remain in control; even if that means treating 'allocated' bullion in similar fashion to unallocated. Those controlling genuinely secure physical vaults KNOW that only a miniscule proportion of their contents will ever be moved and thus behave accordingly. Personally, short of revolution, I can't see that changing much.

  • Report this Comment On April 15, 2010, at 9:05 AM, XMFSinchiruna wrote:

    sabretache,

    I disagree. A truly widespread realization that unallocated gold may not be anywhere near fully backed would embolden gold investors to go to great lengths to ensure that any physical supply they could find after that would indeed be secure in every sense of the word.

    There are plenty of private vaults out there that are unaffiliated with bullion banks.

    The discovery of insufficient supply to satisfy present demand would necessarily lead to a sharp price increase. Retail outlets would be inundated by the little guys trying to procure whatever they could, while the big players would re-position and hoard whatever physical they are able to procure from the banks. Cash settlements received (the most likely scenario) would immediately be converted to physical to the extent it's available, and this immense demand chasing severely limited supply is the mechanism for the price spike.

    That is a characterization of how I personally could see it playing out, and I suspect that the resulting demand would take gold well above $3,000. Here's the kicker ... unlike in 1980 when the spike was followed by a dramatic collapse, and having studied the differences between the two periods as comprehensively as any Fool out there, I believe that the dynamic will be very different this time.

    I believe that prices could spike into the $3,000 to $5,000 range, but rather than collapse thereafter, I believe that a new long-term floor for gold prices will form above $2,000. We'll see if I'm right about the price points, as there is an element of speculation there combined with a more quantitative analysis based upon gold supply, sovereign debt and currency stresses.

    Got gold?

  • Report this Comment On April 15, 2010, at 9:10 AM, XMFSinchiruna wrote:

    profittkr,

    APMEX.com is a well-respected, low cost bullion supplier.

  • Report this Comment On April 15, 2010, at 9:32 AM, XMFSinchiruna wrote:

    aristochat,

    Permit me to clarify some important points.

    Let me speak in terms of what the gold bar list from HSBC ir reporting regarding its holdings for Bank of New York Mellon for purposes of the GLD Gold Trust. You mixed up bar counts with troy ounces in your interpretation of the numbers, but that bar count represents the number of 400-troy-ounce London good delivery bars claimed within the bar list.

    That statement from HSBC is in fact saying that only 132.85 troy ounces of gold are unallocated as compared with a gross weight of 36.7 million troy ounces of allocated gold. The reported unallocated portion is a minute fraction of the reported allocated holdings.

    As I stated in the first article of the series, both GLD and SLV state that the vast majority of their holdings are held on an allocated basis for the trust by the custodian. There is a funky oddity to the structure, though, since it is not allocated with respect to clients.

    http://www.fool.com/investing/general/2010/04/05/is-your-saf...

    This article was not about the ETFs ... it spoke to unallocated gold and silver certificates issued by the bullion banks. Separately, I have identified a number of red flags over the course of my own due diligence regarding the more popular ETFs, but investors are advised to conduct their own due diligence and determine for themselves whether they believe the holdings to be truly unencumbered by competing claims.

    Thank you for permitting me to make these important distinctions and clarifications.

  • Report this Comment On April 15, 2010, at 12:39 PM, mountain8 wrote:

    ChrisGraley,

    Many thanks. I hadn't considered your answer to #2 before. I will have to reconsider.

  • Report this Comment On April 15, 2010, at 3:45 PM, XMFSinchiruna wrote:

    After shipping, premiums, and fees are taken into account, one might be just as well off just holding onto the numismatics. To continue Chris' point, his approach only minimizes the loss of numismatic value if one then purchases bullion with the proceeds. In small quantities, the 3 items listed above could well outweigh any gain by selling now.

    Just something more to keep in mind.

    Fool on!

  • Report this Comment On April 16, 2010, at 4:44 AM, mrnoatak wrote:

    my opinions only:

    I raised the possibility of this situation on the Google GLD blog a long time ago. Is there enough physical gold to back paper gold? Let me humbly suggest another analogy, regarding the confusion of price movements. You order a hundred sacks of flour in advance and get a piece of paper guaranteeing delivery. Then it turns out that the vendors actually can only deliver one sack of flour. You still need 99 sacks. Yes, you could eat dirt, potatos, or willow bark, but you prefer bread. I bet you will pay a lot of money for the physical 99 sacks of flour!

  • Report this Comment On April 16, 2010, at 12:55 PM, MrCainThaler wrote:

    This is a relevant issue and certainly is worth consideration. However, before people totally flee from investment vehicles like SLV, remember that there are artificial ways of emulating the price of silver and not holding the metal without necessarily being short it. For instance, a string of futures creating a synthetic long effect would both allow a fund to not have direct access to the metal and also mimic the underlying price, with minimal variance. This is what I suspect SLV has been doing. I used to own the fund and ended up selling it, for many of the same considerations in this post. However, if you're thinking that SLV or some similar fund would therefore be an excellent shorting opportunity, the results may be egregious for you.

  • Report this Comment On April 16, 2010, at 4:14 PM, XMFSinchiruna wrote:

    Mr.CainThaler,

    Thank you for making that point. Certainly I would not advise anyone to consider shorting one of these vehicles as a result of these red flags. There is no telling when or how any problems in their operating sructure could come to the fore, and in any event this would occur commensurate with potentially enormous price swings in gold and silver.

    I have been saying for years, and will continue to say that I consider shorting of any precious-metals related instrument among the most foolhardy decisions an investors can make as long as we remain in this long-term secular bull market for precious metals.

  • Report this Comment On April 17, 2010, at 7:32 PM, bradrolander wrote:

    This is my first post anywhere on here; I hope you indulge me.

    My situation is that all the physical gold I actually have in my posession is worn by my husband and me as jewelry. Literally we are draped in the stuff (it's a religious custom.) The only other way I can hold gold is in my IRA, and gold as well as silver make up a large percentage of my investment. A long time ago I held GLD there but I, too, worried about it's soundness. Now the investments are split between Canada's Claymore Gold Bullion Trust (now an ETF) and Claymore Silver Bullion Trust (currently still a Closed End Fund.) These two (both are hedged against the US$) publish the bullion bar lists on their web page and claim that they have 100% bullion backing on a fully allocated basis. Yet I never hear them mentioned in online discussions like this and wonder why, and if that means they are just small or if it means I should be in some other vehical for my portfolio physical.

    Any suggestions or comments about this most welcomed.

    Brad

  • Report this Comment On April 17, 2010, at 7:51 PM, bradrolander wrote:

    This is my first post anywhere on here; I hope you indulge me.

    My situation is that all the physical gold I actually have in my posession is worn by my husband and me as jewelry. Literally we are draped in the stuff (it's a religious custom.) The only other way I can hold gold is in my IRA, and gold as well as silver make up a large percentage of my investment. A long time ago I held GLD there but I, too, worried about it's soundness. Now the investments are split between Canada's Claymore Gold Bullion Trust (now an ETF) and Claymore Silver Bullion Trust (currently still a Closed End Fund.) These two (both are hedged against the US$) publish the bullion bar lists on their web page and claim that they have 100% bullion backing on a fully allocated basis. Yet I never hear them mentioned in online discussions like this and wonder why, and if that means they are just small or if it means I should be in some other vehical for my portfolio physical.

    Any suggestions or comments about this most welcomed.

    Brad

  • Report this Comment On April 18, 2010, at 2:38 AM, SnapDave wrote:

    You married Mr T

  • Report this Comment On April 18, 2010, at 3:08 AM, SUPERMANSTOCKS wrote:

    Good article. However, I wouldn't put my money into any thing I don't trust. I haven't owned GLD since 2006/07 and I only own physical silver. That might tell you something. Then again it might not. I think the article has a point about the sham the banks have been running. But the article to me sounds very bearish on gold and silver period. But that is only a perception. I think I might have missed something here though.

  • Report this Comment On April 18, 2010, at 11:31 AM, XMFSinchiruna wrote:

    Superman, a cursory look through my articles on gold and silver will document my longstanding conservative price targets of $2,000 per ounce for gold and $50 per ounce for silver. I think they could run substantially higher still, but these are my conservative preliminary price targets.

  • Report this Comment On April 18, 2010, at 1:43 PM, turbo200 wrote:

    I'm possibly interested in silver of metals holdings.

    Is there a 'best' institution for prices, lowest markup,

    hassles, etc.

    I've read bits about the bullionexhange.com

    northwest mint, APMEX, Monex, PerthMint etc.

    Any good (or 'best' ) recommendations?

    As I seldom have time for trolling (or recalling

    where, exactly, I was) personal replies

    would be appreciated jd7716 at yahoo

    is my address (yes, in the usual format...)

    thanks.

    turbo200

  • Report this Comment On April 18, 2010, at 4:50 PM, bradrolander wrote:

    @ snapdave Well, the analogy is more like HE married Mr. T. I'm a Santeria priest (15 years now) and any Santero who is worth his priesthood, is draped in gold; my husband just gets the overflow.

    @ turbo200 I wrote your in private recommending among another way, http://www.gainesvillecoins.com/

    I'm still wondering if anyone knows the safety/confidance level of:

    http://www.claymoreinvestments.ca/etf/fund/cgl

    and

    http://www.claymoreinvestments.ca/cef/fund/svr.un

    Thanks,

    Brad

  • Report this Comment On April 19, 2010, at 9:28 AM, XMFSinchiruna wrote:

    bradrolander,

    You will encounter little mention of those instruments on U.S.-based sources because the vehicles are not listed on American exchanges.

    At a glance, I see that the Claymore gold ETF utilizes ScotiaMocatta as the custodian. Perusing the prospectus, I see that the reported bullion is either held directly by BNS or by a "sub-custodian". I find that structure potentially troublesome.

    "The net assets of the Claymore Gold ETF consist of physical gold bullion which the Claymore Gold ETF purchases and holds in accordance with its investment objective, strategy, policies and restrictions. All of the Claymore Gold ETF’s physical gold bullion is stored on an allocated and segregated basis in the vaults of The Bank of Nova Scotia, a Canadian Schedule I chartered bank, or an affiliate or a division thereof, or a sub-custodian."

    More troubling still is this passage on page 16 of the prospectus:

    "The Claymore Gold ETF will be invested at all times in physical gold bullion, forward contracts relating to the

    currency hedging strategy for the Hedged Common Units, permitted gold certificates and cash, if any, subject to the

    investment restrictions of the Claymore Gold ETF"

    Gold certificates are precisely what I am advising investors to steer well clear of. I see that as a huge red flag, but that is just my personal opinion based upon a cursory look at the prospectus. Please DYODD.

    Here's another line that caught my attention (page 17):

    "The Claymore Gold ETF does not insure its gold. Allocated gold bullion owned by the Claymore Gold

    ETF is stored in the vaults of the Custodian or sub-custodian once it is delivered to the Custodian or sub-custodian.

    The Custodian maintains insurance as the Custodian deems appropriate against all risk of physical loss or damage

    except the risk of war, nuclear incident, terrorism events or government confiscation. The Custodian maintains

    insurance with regard to its business on such terms and conditions as it considers appropriate. The Claymore Gold

    ETF is not a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or

    amount of coverage. There can be no assurance that such insurance is sufficient to cover any losses which may be

    suffered by the Custodian or sub-custodian or the Claymore Gold ETF."

    Gold bullion holdings sitting in a secure vault on an allocated basis should be cheap and easy to insure. I view a lack of insurance coverage against potential loss by this and several other gold ETFs as another red flag.

    There's more:

    "The physical gold bullion to be purchased by the Claymore Gold ETF will be allocated by the applicable

    counterparty in a commercially reasonable time and manner. There will be a period of time after the Claymore Gold

    ETF has purchased gold bullion but before such gold bullion has been fully allocated to the Claymore Gold ETF, or

    when the Claymore Gold ETF is redeeming Units that the Claymore Gold ETF will hold unallocated gold bullion.

    The Claymore Gold ETF will attempt to limit the length of the period of time during which any gold remains

    unallocated. During this time, the Claymore Gold ETF will be subject to the credit risk of the counterpary and/or

    18

    the vendors of the gold bullion. There can be no assurance that any losses attributable to holding unallocated gold

    bullion will be recovered by the Claymore Gold ETF."

    And I keep finding more passages that would steer me clear of this one:

    "The Manager may suspend the redemption of Units or payment of redemption proceeds of the

    Claymore Gold ETF with the prior permission of the securities regulatory authorities where required, for any period

    not exceeding 30 days during which the Manager determines that conditions exist which render impractical the sale

    of assets of the Claymore Gold ETF or which impair the ability of the Custodian to determine the value of the assets

    of the Claymore Gold ETF. The suspension may apply to all requests for redemption received prior to the

    suspension but as to which payment has not been made, as well as to all requests received while the suspension is in

    effect. All Unitholders making such requests shall be advised by the Manager of the suspension and that the redemption

    will be effected at a price determined on the first Valuation Date following the termination of the suspension. All such

    Unitholders shall have and shall be advised that they have the right to withdraw their requests for redemption. The

    suspension shall terminate in any event on the first day on which the condition giving rise to the suspension has ceased to

    exist, provided that no other condition under which a suspension is authorized then exists. To the extent not

    inconsistent with official rules and regulations promulgated by any government body having jurisdiction over

    the Claymore Gold ETF, any declaration of suspension made by the Manager shall be conclusive."

  • Report this Comment On April 19, 2010, at 11:11 AM, bradrolander wrote:

    TMF:

    Thank you for answering my question about Claymore. The answer is excellent (as are all you posts) but disappoints me. I suppose I will have to forgo the hedging against the US$ that has increased my profits while invested in Claymore's funds and switch to CEF's new Silver Bullion Trust (and Gold Bullion Trust if they have one now). I like being able to pick my own mix of gold/silver so I sold my CEF stock (which you know is a blend of the two metals) a long time back and bought into the stupid GLD and SIVR etfs. I want to wait to make the switch until the end of this month when CEF's Silver Bullion Trust warrents will all be exercised (or less probably expire) so I can get a better idea of what the discount/premium to NAV will be on a fully diluted basis once trading begins with no warrents forming a cliff over the shares.

    Do you know of ANY other way to safely (relatively) invest in physical using a financial instrument aside from CEF's Silver Bullion Trust?

    Regarding the Claymore funds (and probably the CEF Silver Bullion Trust,) I've found them easy to trade in my USA Scottrade account. The Claymore Gold Bullion Trust ETF is just a $7.00 online trade and their Silver Bullion Trust is a bit more complecated, a $27 telephone trade (that I think will eventually drop to the $7.00 online category once the shares become more known - at least that's what happened to their Gold Bullion Trust.) Not all brokers are equal: Schwab wouldn't trade Claymore for me at all so I just pulled my IRA and moved it to Scottrade where I've had no problem placing orders for Canadian traded stocks and other issues that are rather obscure here in the USA.

    Again, I thank you for your answer. Now that I have a clue as to what to look for, I've downloaded both of Claymore's prospectuses as well as CEF's prospectuses, converted them to Kindle format and will read and anotate them carefully over the next few days while waiting for CEF Silver Bullion Trust's Warrents to expire.

    You are a real asset to this site, Man.

    Brad

  • Report this Comment On April 19, 2010, at 11:43 AM, bradrolander wrote:

    TMF:

    One further question that is rather related yet tangental to your posts about the physical gold shell game.

    What are your thoughts on reports of tungsten adulterated gold bullion bars? I know the Claymore prospectus says that all bars will be warented to be COMEX or LBMA good delivery by the vendors but what the hell good is that if they are tungsten cored? Does Claymore, CEF, whoever do assays on all the bars they purchast?

    Or is taking this worry (which would effect even my personally held physical gold - at least that which I haven't gotten around to having made into jewelry yet) too far into the tin-foil hat area?

    Thanks again,

    Brad

  • Report this Comment On April 21, 2010, at 1:54 PM, bradrolander wrote:

    OK. As of today I'm completely out of Claymore and all other gold pool type investments and divided Au/Ag 74%/26% in GTU/SVRZF (so disclosure: I'm long both funds.) GTU trades on the NYSE so is easier to trade than SVRZF which trades on the OTC pink sheets.

    I hope I learned enough from youi TMF, to closely read and look for the right thing in the prospectuses. Both funds share directors with CEF and Sprott is a director of one fund. They both sound as tightly conservtive "fully allocated, insured, unencumbered 95% invested in bullion," as CEF does IMO. I hope I'm right. I'm sure that gold is in for an exciting up-ride at some point during my future investment career and sooner rather than later.

    Thanks for helping me to hone my DD skills (which were non-existant.)

    The ONE thing I will miss is Claymore's hedging against the USA$ which paid off for me in the nearly one full year (well 9 months) I held it. I've lost that now, but am satisfied and feel more peaceful about my holdings which is worth forgoing that feature.

    I didn't buy CEF because I like to create and change my own Au/Ag balance and not be locked into CEF's as well as SVRZF trading at a discount to NAV and GTU trading at less of a premium to NAV than CEF.

    Sprot was trading at an even higher premium to NAV than any of the other funds and had some features in the prospectus that I didn't like.

    Anyway, for what it's worth, If my new fund choices meet with your criteria to get out of the pool, then you swayed one investor to do some reading and switch the vehicles in which he holds his precious metal bullion.

    Thanks,

    Brad

  • Report this Comment On April 24, 2010, at 6:57 PM, houselhoff wrote:

    I have $30k in the perth mint. How do I determine if they have allocated the equivalent amount of gold to what I own? Thanks.

  • Report this Comment On April 28, 2010, at 7:22 AM, bradrolander wrote:

    @houselhoff I don't know - do you have the certificates and what do they say? AFAIK Perth Mint is considered "safe;" it's a quasi- government organization.

    I'm disappointed in SLVFZ, GTU, *AND* CEF - none have provided me with their bar lists despite repeated requests; Claymore has THEIR bar lists as a .pdf download on their pages.

  • Report this Comment On June 16, 2012, at 2:10 PM, conjoblo wrote:

    Hello,

    Could I ask your opinion Sinch on the other funds mentioned here:

    GTU and SVRZF? do you recommend them just as well as you do CEF?

    Thank you.

  • Report this Comment On April 16, 2014, at 11:19 AM, thiagorulez wrote:

    I'm trying to think of way to extend the metaphor with pool fences, but it's not comming to me. Anyway, great points. I hope that this situation is reversible. I'll be glad to do whatever I can to keep a storm from hitting the pool Thiago | http://www.everlastingfence.com/PoolFences/index.html

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