|
Back to the BLOG? ..... Back to the HOMEPAGE? Want to understand why gold isn't at $2,000 an ounce? Listener Keri is equally concerned about relationship between the paper (FAKE!) and the product (REAL). And as usual her research is impeccable. We'll start with the ETF's (exchange-traded funds), which are the biggest "gold" investment vehicle next to the COMEX. Anyone can get into a gold ETF, like iShares or State Street's SPDR Gold (pronounced "spider"), and these ETF's do own gold to back their shares. But, investors do not get gold in return when they cash out shares, they get dollars. These gold ETF's have only been around for a only a few years. State Street was first to the punchbowl in 2004 with the SPDR Gold Trust. They opened at 1 share = 1/10 oz gold. Or, in other words, they sold 10 shares for every one oz of gold they had. The SPDR currently holds in gold 1,127 tonnes, or 36,255,954 onces, worth about $32.3 Billion, and you can see some of it in the HSBC London vault here. Wondering how you, as an SPDR ETF investor, can get some of the shiny stuff? SPDR's response: "The Trustee, Bank of New York, does not deal directly with the public. The trust handles creation and redemption orders for the shares with Authorized Participants, who deal in blocks of 100,000 shares. An individual investor wishing to exchange shares for physical gold would have to come to the appropriate arrangements with his or her broker." And what if they broker said no? Hmm. That’s a thoroughly rhetorical question because those buying gold ETF's obviously don't want physical gold, or they would be buying it. In 2005, to compete with State Street, Barclays lauched thier gold ETF, the iShares COMEX Gold ETF. The opening model also valued shares in the trust as 1 share=1/10 troy oz of gold (Comex price), just like State Street. Now, you're probably thinking two things: 1.) You see the name iShares COMEX Gold ETF, and you are already seeing a HUGE conflict of interest between State Street/Barclays ETF basing their prices and the Comex's spot price, and the Comex's involvement with Barlcays on iShares, and 2.) You are probably realizing that both these ETF's have already dis-joined, and re-joined, and dis-joined, and re-joined from the Comex and their 1/10th basis. And on both, you are right. About the conflicts of interest, Barclays opened iShares based on the Comex price, and linked it to a physical (1/10th oz) "product," less expenses for the safe-keeping of the gold. The Comex price itself is based on lots of thing, obviously, but the two big ones are Demand and Supply....via Comex. I put them in that order because Comex really never has to come to terms with "supply" from its side: most of the contracts don't end in delivery. Comex handles contracts in 100 oz installments on one-month future delivery timetables. As you know, the Comex spot price today is for "May delivery"....but only about 1% of Comex contracts are ever actually settled with physical gold exchange. 99%, therefore, are settled by selling back the contract, at either profit or loss. Just hold that thought for a moment. Back to the ETF's, iShares holds 2,178,445.298 oz gold. When you click this link, you'll see something very interesting if you look at the "Shares Outstanding" tally. The shares outstanding, as of today, are 22,150,000. Now, remember, this is at 1/10th oz per share less expenses, right? Total gold holdings (assets in oz) = 2,178,445 oz Shares outstanding 22,150,000, x 1/10 (to convert to shares outstanding in oz)= 2,215,000 oz. Difference = -36,555 oz, or 365,550 shares (unadjusted for expenses, which reduce the gold holding because they sell gold to cover expenses!) WOW! Barclays own prospectus says the ETF has sold 365,550 more shares in iShares than "gold" is has to back it up! This is called leverage. Now, how can they get away with this? Three things, at least: So what about the Comex, should they do something about this? The COMEX is a commodities-futures market exchange now owned by the NYMEX, they are required to deliver if the holder of the contract holds it past the one-month maturity. But 99% of contracts are sold well before that maturity. And, remember, we have two ETF's that are selling derivate "stocks" based on the underlying asset of "gold", as priced by the COMEX. Consider this: Gene Arensburg, "Resource Investor:" So that the price of each share of GLD (symbol for the State Street SPRD ETF) tracks very closely with the price of 1/10 ounce of gold (less accumulated fees), authorized market participants (AMPs) have to add metal and increase the shares in the trading float when buying pressure strongly outstrips selling pressure. The reverse occurs when selling pressure overwhelms buying pressure. For the year 2008 so far, GLD has added a net 119.18 tonnes of gold bars to its holdings. For context, 119.18 tonnes is about 3.8 million ounces. The gold metal on hand in the COMEX warehouses as of October 23, was reportedly a little over 8.5 million ounces. Thus, so far this year one ETF, GLD, has added the equivalent of 44.7% of all the gold actually held on the COMEX. (No, that’s not a misprint.) WHOA! But wait, he's not done: Put another way, during 2008, buying pressure for GLD so overwhelmed selling pressure that the authorized market participants had to add just under half the amount of metal that the COMEX (which still more or less sets the price) has to work with in its member’s vaults. What is kind of interesting about that is that if you add up all the contracts that are traded on just the COMEX, all 319,472 of them as of last Tuesday (Oct 2008), that amounts to contracts either side, long and short, of 31,947,200 ounces. That means that the COMEX is trading almost 32 million ounces of gold but only has about 8.5 million ounces backing those contracts up." Remember from above SPDR's holding: 36,255,954 ounces. SPDR has added in 2008 to its holdings an amount equal to 44.7% of the COMEX holdings. The gold now in possession of the SPDR ETF is not available for delivery on COMEX contracts, because its their freakin' property, although they themselves do account for a lot of activity, and so they surely buy/sell their gold to suit the demand on their shares, which probably does account for a significant percentage of those COMEX contracts in the first place. Not to mention, COMEX lists private gold they hold that is not available to settle contracts as part of their 8.5 million. So, how is it that the COMEX, even with the activity of SPDR and iShares, is overseeing trades on 4 times as much gold as it knows its participants have? The COMEX itself is a super-big ETF....a derivative, that's how. In other words, if only 25% of the COMEX contract holders (instead of the usual 1%) decided to demand delivery, the COMEX would be 100% empty. What the hell is that? Leverage, again. So, if you are interested in keeping the COMEX alive, you are not gonna let that happen. Without the COMEX, there are no more ETF's, because those share contracts are specifically, legally based on iShares and SPDR's requirement to link to the COMEX. So you have to consider who's interests are best served in allowing the leverage to continue uninterrupted. Hold that thought. In my opinion, since ETF's of all forms attain thier "value" based on the relationship between the values of their underlying assets and the market demand for those assets, to me all ETF's are fundamentally complex derivative vehicles, including the gold ETF's. But at least the gold ETF's have some gold to back them up, even if they are leveraging shares over actual ounces. The fact that they have some real metal makes them at least a little better than, for example, an MBS-backed ETF based on "pieces" of mortgages that doesn't even own one single house to repo if they needed it. I would NEVER get into these gold ETF's or any ETF's (but I only do gold and silver, anyway), because it makes more sense to me to hold it in my hands. But, again, at least they have some backing to thier "gold" title. Worse case scenario, the COMEX defaults, the ETF's must de-link from it, but then at least they have something physical to sell to cover their obligations once a new market method opens. Or they could just sell it directly to banks. I still don't like the idea, but I mention this because now we are gonna get into the total derivative, total paper, total nonsense "gold" investment vehicles: the ETN's. These are the super-duper-dependant-on-COMEX vehicles, because they are backed by NOTHING. And that are, I believe, backing the COMEX. ETN's are exchange-traded notes. ETNs are unsecured debt obligation offered by banks that are linked to some index. Duetsche Bank is a big player in gold ETN's (they offer 3 from which to chose), but there are lot others. ETN's are not backed by gold, they are paper-only, debt securities linked to the value of gold--someone else's gold (what does this sound like?!). How they are "linked" to gold at ALL to me is, of course, a mystery, other than DB says they are linked, so they are. The ETN's are settled in cash. DB profits when investors buy gold-price based ETN's when gold is high under the belief it will go higher, but then get impatient or have to cover shorts, and decide to sell it back when gold goes lower. DB (or actually, anyone else on the secondary bond/ETN market which is where most of the action is) then can hold or resell the ETN's. Like COMEX, if investors held DB ETN's and gold went up consistently, and they wanted to hold to the note's maturity, DB would have to pay those out at the linked price to gold, which would of course increase due to the fact that the "supply" (imaginary as it is) was being constricted, thus feedbacking into a increasing spiral. DB has ZERO interest in gold moving higher. None of the ETN issuers do, if they are the kind that claim the debt as gold-linked and bank-backed, like DB. Fourth BIS Annual Conference: Past and Future of Central Bank Cooperation (2005), (You'll see some interesting names on this document, including former Fed chief Paul Volker and Andrew Crockett, former JP Morgan Chase, current BIS General Manager, head of the FSF). But the real deal is the following from pg 2. The words are those of the BIS' William White. Consider the title of the document as you read this: Past and Future Central Bank Cooperation: "Fourth, the efficient international dissemination of both ideas and information that can improve national policymaking. And last, the provision of international credits and joint efforts to influence asset prices (especially gold and foreign Well, well, well. White is citing and praising the role of central banks cooperating to influence asset prices. I don't know about you, but on this planet, we call that a cartel. Interesting also is, he says "asset" prices, not "commodity." This goes to my own inclination that gold leans closer to still being a old-fashioned currency much more than a modern commodity (though I don't extend that to silver completely). He groups gold with foreign exchange and international credit, each of which the central banks, though the BIS, of course are manipulating, because they are the SOLE determinants of both. These comments were made in 2005. Gold, as you know, has vastly increased in dollar price since. Did they start to loose their grip....or did they show their hand? This is all super relevant to something that is happening right now. Read this article here, it is very much worth reading: "Did the ECB save COMEX from gold default?" GATA (who of course includes Katherine Austin Fitts, who is the real deal) has been all over this idea of the COMEX smoke-screen for many moons. From the article: "In normal times, very few people do this [referring to holding COMEX contracts to maturity and demanding delivery]. Only about 1% or less of gold contracts must be delivered. The lack of delivery demand allows the casino-like world of paper gold futures contracts to operate. Very few short sellers actually expect or intend to deliver real gold. They are, mostly, merely playing with paper. It was amazing, therefore, when March 30, 2009 came and passed, and so many people stood for delivery, refusing to part with their long gold futures positions. [Long in COMEX means 1 month!] "On Tuesday, March 31 (2009), Deutsche Bank (DB) amazed everyone even more, by delivering a massive 850,000 ounces, or 8500 contracts worth of the yellow metal. By the close of business, even after this massive delivery, about 15,050 April contracts, or 1.5 million ounces, still remained to be delivered. Most of these, of course, are unlikely to be the obligations of Deutsche Bank. But, the fact that this particular bank turned out to be one of the biggest short sellers of gold, is a surprise. Most people presumed that the big COMEX gold short sellers are HSBC (HBC) and/or JP Morgan Chase (JPM). That may be true. However, it is abundantly clear that they are not the only game in town. Closely connected institutions, it seems, do not have to worry about acting irresponsibly, in taking on more obligations than they can fulfill. Mysteriously, on the very same day that gold was due to be delivered to COMEX long buyers, at almost the very same moment that Deutsche Bank was giving notice of its deliveries, the ECB happened to have “sold” 35.5 tons, or a total of 1,141,351 ounces of gold, on March 31, 2009. Convenient, isn’t it? Deutsche Bank had to deliver 850,000 ounces of physical gold on that day, and miraculously, the gold appeared out of nowhere." Why am I not surprised? Here it is also worth noting that you already know: DB and the ECB are as similar as Citibank and the Federal Reserve System, they are both shareholders in a private central bank system. Keri has been to Frankfurt and has walked from the DB massive skyscrapers to the ECB massive headquarters, and she’s touched that creepy euro sign and stars thingie they have in front of it and all. No one is gonna tell her its a "coincidence" that the ECB and DB make moves on gold in the same day. They didn't even have to pick up the phone--they could have walked. Remember what White praised the BIS and member banks for, "the provision of international credits and joint efforts to influence asset prices, especially gold". And now remember that paper gold from above....especially the ETN's provided by...who?....Deutsche Bank. What would happen to DB if the COMEX suddenly defaulted on some contracts? Everyone gets scared, the demand for gold moves up and the supply is withdrawn. And here's COMEX sitting on million of paper promises to deliver...but more importantly, here's DB sittin' on millions of ETN's based on the price of the underlying asset--gold. It's an incestuous relationship, indeed. The only answer is "Dude, just hold it in your hand!" These guys love their fiat money world--remember what fiat means: "let it be done." They can "let" anything be done. I don't expect to take my slabbed Gaudens, put them in a box today, and magically have 2 tomorrow, or somehow have only 1/2, cut right down the middle, tomorrow. They are physical, and they don't change. Now this ETF/ETN/fiat money business? Hell, that's the purpose of getting into that! The idea there, as with all derivatives, is to magically buy something this morning that will multiply by night. Okay. I get it, I understand it, and I know I can make a lot of "money" doing it. But its a shell game, and I just don't go there. Again, the William White at the BIS, above document, pg 18: "And part of the explanation of what is going on in terms of the accumulation of reserve assets and the private flows of money to the United States, I would suggest to you, is the market reacting with the continued internationalisation of the dollar. It is happening to an extent, and even beyond what has happened before, as a kind of quasi substitute for a world currency." And what would happen to this "quasi" world currency if the BIS (and member central banks) lost thier grip on manipulating gold? How quasi would their fiat be now? As usual—wonderful research from Keri. So that doesn’t turn your stomach? Maybe Keri’s latest discovery will. She writes: I was looking the Federal Reserve's site for something (much more research needed, but I will update you when I have it), when I found this link on the homepage, from the master FRS site to the Boston bank's site: http://www.bos.frb.org/consumer/lessons-from-a-storm/ Be forewarned: It’s a movie. Yes, a movie. The Federal Reserve is making movies now. Its called "Lesson from a Storm: Banking for Safety." You might be thinking they are talking about the "storm" of this crisis. That's what I thought. But no, they mean a literal storm--they mean Hurricane Katrina. Yes, this movie is targeted at what the FR calls the "Unbanked." Yeah, you're a terrorist, and people without bank accounts are "the unbanked." At least its not as ridiculous as the multi-state "Fusion" center video recently released, "Seven Signs of Terrorism" (that one INFRUIATES me!). But maybe we need a hotline for tips if we spot the "Unbanked." Maybe random ATM card check-points. Gees...funny how the video is leaving out the part in Katrina when the "banked" people couldn't get thier money out of the ATM's because there was NO POWER. And how the money then ran out anyways. And how the banks couldn't get more money because they couldn't get a truck in. And how most of them closed. And how the banks were flooded... If you watch the video, check out the look of fear on the host woman's face as she says lines like this: On the "unbanked": "Almost one in nine families have NO bank account...." On electronic payments: "With automatic bill payment, the amount of Natisha's bills monthly ultility and phone bills are deducted automatically from her checking account....she no longer has to individually pay each bill..." I understand what the FR is trying to do. The naive part of me thinks, Oh, its nice to see someone offering a little financial education for people who aren't getting it from the "government halls of indoctrination." Just the other day at Morehouse College, I listened to Bernanke say that he though the FR had a responsibility to inform people, especially minorities, about the advantages of banks and against the pay-day check cashers. I don't like those pay-day places either and I tell people not to use them, but the FR doesn't like them because they are competition. The rest of me knows that they probably made this video (why wait 4 years if it is so important?) because they want that 11% of "unbanked" to get "banked." Like Obama says, one dollar in a bank is 8 or 9 dollars in the economy, and they want that damn money. Eleven percent is sure worth chasing. |