Buy Gold and Silver How to Buy Gold How to Buy Silver Gold Commentary


Friday, February 27, 2009

Where Do Gold ETFs Buy Gold?

When it comes to the gold in exchange traded funds ( Gold ETFs ), where do the Gold ETFs get their bullion from is a question often asked and the answer seems to be a very elusive one indeed.

Gold ETFs are an exchange traded fund but with gold being the metal the trade is based on. When you buy a Gold ETF, it is quite different to buying and selling physical gold bullion. To understand it better here is a simple understanding of what a gold ETF is.

Exchange Traded Funds

An exchange-traded fund, or ETF, is an investment system traded on stock exchanges, in a similar way to stock and shares. An ETF holds some assets and uses these assets as a basis for the trade. People will then buy and sell or trade funds on a regular basis. All trades of ETFs trade at the net asset value of the stock or assets at the time of the actual trade. An exchange traded fund has funds and stocks in a product, in this case gold, and trade is made on the basis of the current price of gold in gold ETFs.

The original purpose of an ETF was considered to be a method whereby investors would be able to invest in the growth of an industry or even commodity that was not easily available to the market prior to ETFs. But some consider ETFs were set up more as an easy way to manipulate the market for financial gain.

Regardless of the reasons an ETF should have some backing for any trade. Questions are being asked, however, about the amount of assets, used to back up the trades and, indeed, if they really exist.

Only a few short years ago, Stephen Murray, of GATA (Gold Anti-Trust Action Committee), made note of the fact that duplication of gold bars, held by one of the largest Gold ETFs, was occurring. This means that the assets of gold bars for that ETF would be less than actually owned by the gold EFT. This gave rise to the question then, how much of the gold etf is really backed by gold?

The Gold Market

Over the past year or so the amount of gold available for purchase from bullion dealers has decreased. Gold coins are increasingly hard to obtain, indeed, many have minting delays.

Orders for gold bullion that once took days to supply now have a waiting time amounting to anywhere from a couple of months up to six months to complete orders.

Jim Sinclair, precious metals specialist and a noted commodities and foreign currency trader, has made the observation that GLD, a large gold ETF, recently stated they acquired 45 tons of gold in one month. This is a staggering amount of gold to acquire in one hit and begs the question. Where did it come from? There were no substantial deliveries from the Comex to account for such a large influx of gold and with such a tight gold market it is difficult to accept that GLD can pick up such a massive quantity of physical gold bullion.

Furthermore, current world record keeping tracking all gold sales of any appreciable size eliminates all exchanges around the world as a source for this 45 tons of gold to any gold ETF.

Jim Sinclair points out:
"A read of the original prospectus removes any thought that the gold is leased, but leaves one to invite probability. That probability is that the claimed gold can only be OTC (over the counter) derivative long positions. If that is so then the financial reliability of the paper stands on the foundation of the balance sheet of the granting counter party to the OTC derivative. This is true regardless of whether it is a mine or naked speculator."
So it would seem that it is not necessarily the case that, if you own some GLD gold exchange traded funds, that you own any gold. One cannot 'redeem' ETFs for gold, only for funds.In today's economic climate where gold is increasing in value and the financial markets are unstable, could this be an attempt to encourage more investors away from actual gold with a false sense of security in gold ETFs?

Jim Sinclair goes on to point out:
"Can you imagine a situation where a person buys a gold ETF to own “non-gold” but finds out that they in reality own OTC derivatives on gold? That would be an investment in the same type of financial instrument (not gold) that one owns gold bullion to protect against.

I think you own an ETF of derivatives, not of gold!

If I am correct then there is no clearinghouse guarantee for the OTC derivative to function.

Like so many other surprises of the last two years the Gold ETF shareholder may actually have no gold at all.

A perfect Ponzi scheme would allow you to surrender shares for bullion. You need only think about it."
When it comes to gold in exchange traded funds, this is, indeed, food for thought.