Today In Silver

Recently Adam Hamilton, CPA turned newsletter writer, wrote about conspiracy theories involving the huge SPDR Gold ETF, GLD. We think Mr. Hamilton is quite smart but often he gets bogged down in verbose details just like we do. In any case, he lays out a very strong case for why GLD (and by extension other ETFs) are legitimate holders of metal. That hasn’t stopped some conspiracists such as Jeff Nielson from responding that Even Gold Experts [are] Fooled by Bullion-ETF’s. Unfortunately, Mr. Nielson’s arguments are vapid and one-dimensional: “do not buy GLD or SLV unless you trust bankers”. We would suggest that anybody who is convinced by this line of “reasoning” should also not have bank or brokerage accounts, mortgages, credit cards, insurance policies, stocks or bonds. They should also stay away from any object that is sharp, heavy or capable of launching projectiles at a high rate of speed.

Normally. we’d tell you to go read both of these dueling GLD conspiracy articles. But in this case, why bother? It turns out that hidden within the several thousand words written by Mr. Hamilton, he reveals the only thing that actually matters:

Provocatively, GLD does actually have third-party audits of its physical gold despite conspiracy theorists’ rants to the contrary.  This ought to be really embarrassing to the conspiracy theorists, as it proves they just parrot old rumors rather than doing original research on their own.  GLD hires Inspectorate, a venerable commodities-testing and inspection company founded in 1927.  Each year it performs one complete physical-bar count and a second random-sample count at a different date.  It certifies the results.

In tennis, this is what we call game, set and match. Why Mr. Hamilton buries this information deep in his anti-conspiracy theory rant is puzzling. Frankly, we weren’t aware that GLD (actually, GLD’s sponsor) has recently hired a firm separate from GLD’s external auditors to perform a complete physical count and reconciliation of the gold bullion held by the SPDR Gold Trust. We suspect this additional bar count was specified to put the conspiracy theories about GLD to bed once and for all. And that it does. In fact, if after reviewing the Inspectorate certificate [PDF], somebody still claims that GLD does not hold the gold that it says it does, that person is being disingenuous at best and a downright liar at worst. Exceptions can be made for those who do not trust bankers, but only if they don’t have bank or brokerage accounts, mortgages, credit cards, insurance policies, stocks or bonds.

We know some of you are not going to click the link to the Inspectorate certificate [PDF], so we’ll provide the relevant excerpts here.

21st October 2009

Dear Sirs,

Re: Count of Gold Bullion

World Gold Trust Services have engaged Inspectorate International Ltd to conduct two counts each year of the gold bullion stock held on behalf of the SPDR Gold Trust (the “Trust”) at the vaults of HSBC Bank USA National Association (the “Custodian”) in London. A complete bar count is conducted once per year and coincides with the Trust’s financial year end at 30th September. The second count is a random sample count and conducted at a date which falls within the same financial year.

It is with pleasure we submit our report to the Trust covering our count for the record date as of 10th July 2009.

In accordance with the agreed procedures, we hereby report the following:

Name of Account:  Bank of New York Mellon - SPDR Gold Trust

Bullion Account No:  18984

Material:  London Good Delivery Gold Bars

Location:  London Vaults of HSBC Bank USA National Association

Gold Inventory:  As per the records of the Custodian at close of business 10th July 2009 this account held title to 89,797 Lond Good Delivery, large Gold Bars of a purity between 99.50% and 99.99% and a weight of 36,015,108.723 fine troy ounces of gold.

Description of Activity:  We performed a full count of 89,797 bars of gold, based upon the gold inventory as at 10th July 2009, between 15th July and 20th October 2009 at the Custodian’s premises and performed certain procedures including but not limited to the following:

• The gold inventory records of Bank of New York Mellon were reconciled to the records of the Custodian.
• Each individual gold bar in the gold count was agreed to the records of the Custodian as being held in the name of the above referenced account. The bar number, refiner brand and purity of each bar were checked against the records of the Custodian.
• A statistically random sample of the gold bars counted were weighed and the weight checked against the Custodian’s records.
• The records of the Custodian at 10th July 2009 were reconciled to the records of the Custodian at 20th October 2009 being the last day of the gold count.

Anomalies:  The anomalies identified on the gold count for 10th July 2009 are as follows;

We’re not going to detail all the anomalies, go read the certificate if you are interested. But to summarize, basically there were about 300 bars with the wrong refiner recorded in the Custodian’s records and about 100 bars had a mistake in the bar number (most typically an incorrect prefix letter). While having 400 recording errors out of 90,000 bars is somewhat a sloppy percentage, importantly there were no missing bars or bar weight discrepancies. A normal bar inventory would focus on just the bar count and total weight, not a 100% inspection of the Custodian records, so these errors are likely to have accumulated over a period of time. Future Inspectorate audits should result in fewer bar count anomalies.

We’d like to end things here but two observations by Mr. Nielson are still stuck in our craw. First, we have:

All that has ever been established is that the bullion banks have enough bullion to cover either their short positions or the custodian agreements. If these bankers had to choose between defaulting on their own short positions – which would permanently discredit them in commodity markets, or defaulting on their custodian agreements (and pay a small fine), which course of action would these bankers be most likely to take?

This of course is bass-ackwards. Even if it were true that the bullion banks hold massive naked short positions in gold and silver, it would be far less damaging for them to default on such derivatives than “defaulting on their custodial agreements”. Custodial fraud is not only about the worst thing for a banker’s (or anybody else’s) reputation, it is also a very serious criminal matter. A custodian who does not adequately protect his or her clients’ assets will literally never work in that town again. Therefore, the “course of action” that the bankers will always take is to default on the alleged naked short derivative position while protecting the custodial relationship at all costs.

Next, Mr. Nielson brings up the bugaboo of the fabled Morgan Stanley settlement:

What other possible reason could the gold miners who founded GLD have for choosing the bullion-bank shorts as “custodians” for their gold? Is it because these banks represented the safest storage option for GLD unit-holders? Hardly. These same bankers have a long history of bullion fraud. The most recent example of this was when Morgan Stanley recently paid millions in damages for simply pretending to buy bullion – on behalf of its own clients (see “Morgan Stanley pays damages for Precious Metals Fraud”).

Our problem with the “fraud” involving Morgan Stanley is that these were merely unproven allegations by the plaintiffs. Morgan Stanley provided evidence to both the plaintiffs and the judge that precious metals were in fact purchased on behalf of the plaintiffs. In the end, Morgan Stanley settled but did not pay either a fine or damages. We believe the settlement was essentially an admission that Morgan Stanley should have provided additional disclosure to its unsophisticated clients about the available bullion storage options. These unsophisticated clients (the plaintiffs) invariably chose unallocated storage even though they apparently wanted allocated, segregated ownership. Anybody who would like to check the details of the settlement can do so here [PDF]. In any case, the Morgan Stanley settlement is neither “bullion fraud” nor is it “pretending to buy bullion” and moreover bankers do not have a “long history of bullion fraud”. Any claims otherwise need to be accompanied by documented proof.

In conclusion, the question of GLD gold holdings has now been answered once and for all. Time to move on to the next conspiracy theory.

silverax Windbag Wisdom