Buying Bullion not ETF’s

We speak regularly of the shear amount of trade in gold and silver that happens in ‘paper’ markets – COMEX futures contracts and Exchange Traded Funds (ETF’s) as opposed to physical bullion.  There is currently, and we stress currently, the anomaly whereby these trades, where a tiny fraction is backed by real available gold and silver, dominate the price fix that dictates all gold and silver trade.  

ETF’s are back in favour this year with, according to the World Gold Council, a near record 364 tonne of gold flowing into them in Q1 of this year as even Wall St can see what’s coming.  ETF’s are an easy vehicle, particularly if you are a Wall St type with full faith in the ‘system’ and don’t understand how easy it is to own the physical metal, and that it is usually cheaper than the 0.4% annual fee that usually comes with an ETF.  The other lurking threat is counterparty risk, of which there is ZERO if you own your own bullion.  Lawyer and financial analyst Avi Gilbert scoured through the PDS of the biggest gold ETF, GLD.  This is his conclusion:

“In the event of a default of the trust in which the gold is held, one becomes an unsecured creditor of the trust. That means that the trust will likely be required to liquidate its positions in the metals, and satisfy the unsecured obligations of the trust, usually at pennies on the dollar. None of the gold being held in trust within the GLD is designated to each holder of shares on an individual basis. Therefore, all the owners of the GLD have equal rights to all the gold being held in trust. So, if there is not sufficient gold to satisfy all rights to that collective gold, all the owners are subject to a pro-rata reduction in their ownership interest in the total gold being actually held and on hand.”

Just a couple of days ago too we saw Bank of Montreal file their prospectus for their $500m physical gold fund where shares are denominated in ounces not dollars (ala ETF’s).  There was a startling admission in that PDS, namely that their fund seeks to eliminate:

"derivatives risk (i.e., the use of unallocated gold, gold certificates, exchange-traded products, derivatives, financial instruments, or any product that represents encumbered gold)," as well as "'empty vault risk' or gold bullion lending risk (i.e., the practice of the gold custodian lending, pledging, hypothecating, re-hypothecating, or otherwise encumbering any of the investors' underlying gold bullion)."

That a major bank is essentially calling the others on their dodgy practices in an instrument lodged with the US SEC is incredible.  Another sleeper, and one that strikes a chord with the weight of evidence of major banks manipulating these markets, is they warn that the "official sector" is active in the gold market and can affect prices….

We last wrote here of the allegation that J P Morgan are simultaneously suppressing prices with a massive ‘paper’ short position on COMEX whilst buying up over 400m oz of physical silver.  The question is when do they take their foot off the shorts and let her go?