gold eft's. frauds?

  1. 47,086 Posts.
    A lot has been said about GLD in the US. This is just a bit more.

    By Howard Ruff
    The Ruff Times
    February 2005

    I recently got a phone call from a subscriber, David Homes.
    He is a very sophisticated and significant gold investor.
    He has been viewing with alarm the development of exchange-traded funds, or ETFs. They will be touted more and more but he has some serious reservations. I asked him to write an article. Read it carefully, and I have some comments at the end of the article.

    * * *

    By David Homes

    You're bound to hear about the latest craze in gold investing: GLD. This "exchange-traded fund," or ETF, is supposed to make gold investing simple and convenient.

    Each share of GLD is valued at one-tenth of an ounce of gold's current market price. Apparently GLD merely "tracks along" with the current spot price of gold with no real ability to redeem your shares for physical metal. To me this sounded like some kind of side-betting racket, so I contacted Merrill Lynch for some answers.

    Merrill Lynch is offering GLD, but for serious questions the local broker referred me to the powerful research department in New York. They raised more questions than answers.

    My next stop was the Securities and Exchange Commission. After the expected pinball routine, I ended up chatting with one of their enforcement lawyers, who indicated that I was not the first GLD prospect with concerns. Evidently GLD was facing the possibility of a formal investigation after just a few weeks of operation.

    It would appear that the legal structure of GLD was so carefully and intricately conceived that it was able to circumvent even the most basic disclosure and reporting requirements of the SEC itself. What are they trying to hide? No publicly traded company enjoys this kind of privacy.

    I learned that the ambiguous World Gold Council was involved with GLD, so I contacted them next. After many attempts and several days, I finally made a meaningful connection. My first question addressed the opacity of GLD. The WGC official's response was simply not credible. He said, "Because we are dealing with gold, the SEC requires that we adhere to certain security procedures."

    He told me that all gold was held in London in the HSBC vault. My next question was my last: "Are client funds backed up with 100 percent physical gold, or would you be including future-production pledges as part of the assets?"

    "Sir, I really cannot discuss this with you because of the way we are structured. Good day."

    Bottom line: The problem I have with the whole idea of ETFs is this opacity and the potential drag that it could represent to the real gold market.

    The best insurance for a strong gold bull market is, of course, physical ownership of the metal by the public -- period.

    At best ETFs represent something less than 100-percent real-market impact. At worst ETFs are just the latest scheme by major gold interests and the Silver Users Association to maintain price and inventory controls. By creating a popular side-betting mechanism, they are able to divert and neutralize billions of dollars that otherwise could have a major impact on the price and supply of the physical metals.

    In fact, that these ETFs are popping up could mean that metal inventories are getting desperately low.

    Prove me wrong. I'll give 100 ounces of silver to the first person who can convince me, with evidence, that GLD is not a Trojan horse. Until then, my money is on physical metal and quality mining shares.

    * * *

    David's essential gripe is that buying shares of GLD will not take gold off the market and reduce supplies as a normal gold purchase would, raising the price. Consequently, GLD will have no effect on the gold price. Perhaps GLD is useful as a tracking mechanism but lacks the real-world effect on price. In other words, the world could buy GLD and gold wouldn't budge an inch.

    -- Howard Ruff
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