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Trading Lessons

Gold and Silver ETF's (GLD, SLV) Disparities With Gold Price Means Higher Risk

Commodities / Gold & Silver Stocks Jan 24, 2008 - 12:21 PM GMT

By: Richard_J_Greene

Commodities

Best Financial Markets Analysis ArticleI have heard from many investors inquiring if they should sell their gold stocks and just buy the gold and silver ETFs. The first thing they should understand is that doing so would prolong the time they must wait for gold and silver to reach their true market levels which are much higher. The gold and silver ETFs were created by such financial giants as JP Morgan and Barclay's Bank that also serve as custodians and sub-custodians. These are the very firms that have been involved in the process of short selling gold and silver in huge quantities. That they would be involved in creating the ETFs had to be considered as most unlikely unless they had nefarious purposes.


What I mean by that is that when the gold and silver ETFs first came out the investment demand for gold and silver was just in the initial phases of taking off. The bullion banks and financial powers that have been involved in suppressing the prices of gold and silver needed an outlet to satisfy this additional demand for gold and silver when there was clearly no actual gold and silver to fulfill this additional demand.

Most do not like to recognize that the business model of the US is fast approaching what could be called Fascism, particularly since that word is immediately associated with World War II Italy and all the ugliness of the Axis powers. However, when one looks at the definition of what fascism is, it becomes clear that many of our Government's decisions benefit the large corporations more than the people the government is supposed to be serving. In return, these corporations return all their support in both monetary contributions and affirmations of policy through such means as the media which is largely controlled by the same money powers. Look no further for evidence in some of the examples that have arisen with the outbreak of the unconstitutionally un-declared war on Iraq. Instead of the military providing services by use of its own personnel for things such as laundry and meals, big corporation's line up for their part of the money pile. A perfect example is Halliburton which handles laundry for the soldiers at an outrageous fee of $99 per bundle, and this in a country where such a service would be a tiny fraction of such a fee.

Based on the surrounding circumstances you would have to be naïve if you believe that the gold and silver ETFs were created so that investors would have an easy way to get exposure to gold and silver without the burdens of taking delivery and finding a secure and safe location to store it. The one and only purpose was to fulfill a dire need to satisfy a growing and steady investment demand for gold and silver that has no hope of being fulfilled by the actual production or availability of real gold and silver. That no one can see this charade is truly amazing since it is so easily revealed that a second grader could understand it. I can give an example that should truly make the buyers of GLD or SLV seriously question their investment choices.

There is simply no room for any additional demand for gold and silver, particularly investment demand which is already growing rapidly and exponentially. So what to do about this dilemma? If you are one of the big short sellers of gold and silver and see that the jig is up and investment demand has reached a level that will overwhelm your ability to keep it under wraps, how can you find an outlet for this demand? Why not provide a piece of paper that promises ounces of gold and silver since they know they can't produce the real thing? Gold production is in decline. The world's biggest producer, South Africa, reported a 12.7% decline year over year in production enabling China to surpass it as the largest producer.

The following example a second grader should be able to follow. Yesterday GLD traded at a price of $87.05 while gold futures were $882.00 and spot gold was at $881.00. I called my best sources and the best quote I could get for purchasing one ounce of physical gold was $897.00. So here is the question: If you were buying ownership of gold at an effective price of $870.50 for an ounce of gold by buying the gold ETF at $87.05, how does the gold ETF turn around and purchase real physical gold for you when the spot price is $11.00 higher, the futures price is $12.00 higher and the physical price is $27.00 higher?

That is a neat trick. I wonder how they do it. YOU SHOULD START WONDERING TOO! Do you really believe the GLD ETF can survive loosing $27.00 for every ounce of gold that they buy for you? Now you know why the custodian and sub-custodian's agreements for these ETFs are so complicated and un-auditable. It would make sense that the GLD would have to trade at least $4-$5 higher than the price of gold if they were actually buying it, insuring it, guarding it, and delivering it. They say there is a sucker born every minute. This should help to prove that point. 

If you can understand that the current economic and financial environment screams for protection through ownership of gold and silver, please stop shooting yourself in the foot by thinking that the ETFs will do anything but delay and muffle the rise of gold and silver and leave the ultimate holders with nothing but worthless paper at exactly the moment you will need gold and silver for your financial survival. Nothing compares with having the gold and silver in your own possession and the gold and silver ETFs are way down the list as far as safety goes, and far below even gold and silver stocks.

By Richard J. Greene
http://www.thundercapital.com

© 2008 Richard J. Greene
Richard is Managing Partner, Portfolio Manager of Thunder Capital Management. Richard graduated from St. Leo College, received his MBA in Finance, Management and International Business from the University of South Florida and is a Chartered Financial Analyst (CFA).

Thunder Capital Management LLC was founded in July of 1999 with the mission of creating wealth while preserving capital. Founder and Portfolio Manager Richard Greene, who utilizes his unique combination of expertise and experience in a wide range of markets, industries and investment vehicles, oversees all investment activities of the firm.

This article is made available for informational purposes only and is not intended to be an offer to sell or the solicitation of an offer to buy interests in any fund. Such an offer will only be made upon the delivery of a confidential offering memorandum which are available to pre-qualified persons on request.

Richard J. Greene Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Tony Vegas
24 Jan 08, 15:30
Get your math right

Like most conspiracy theorists, your words have gotten ahead of your facts. Each share of GLD is backed by 0.0987579 ounces of gold. At $87.05 per share that means the effective price per ounce is $881.45, not $870.50.


Matt
20 Feb 08, 18:04
Gold ETF

Because the Gold Trust does not purchase gold directly. The creation redemption process for ETFs keeps the price in line w/ the NAV.


Tony Vegas
20 May 08, 11:52
Incorrect gold etf article

The author mistakenly thinks that each share of GLD is backed by 0.1 ounce of gold. While that was true when GLD first issued shares in 2004, each day the fund's expenses (0.4% annually) are paid in gold by deducting from the amount held for each share. Thus 3+ years later each share is backed by only NEARLY 0.1 ounce (0.0986253 at present). This accounts for the price difference.

READ THE PROSPECTUS.


E Hampson
20 May 08, 16:03
may 20 2008 Oracle page 1 Nadeem. Walayat

ref paragraph 3

Dollar devaluation is 40% since july 0001 not "during last

12 mos or so"


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