The Goldenbar Report

GLD: Incompetence or "Told You So?"
If it's genuine, questions inspire confidence
- once answered

10 December 2004
(Originally Posted to Subscribers 09 December 2004)

A Goldenbar Editorial
by Ed Bugos

Print Copy

A test it shall be. Gold prices fell out of a seven day (island or diamond) top formation whose objective was about $438; the front month finished down $15 to $439 after trading as low as $435. Though it was the worst one day decline since April, no important trend lines or supports were broken yet.

We basically tapped the 40-day moving average. The $435 handle is key support for the runaway scenario as well as the November break out point.

It should be a good buying day.

My worst case short term view is a decline to about $418, a level that the bulls and bears have fought over more often than $435.

(see Brimelow's comments further below on COMEX open interest with respect to "flat period" in the graph above depicting the fund's gold holdings since inception).

There are three things that I really like about this gold move so far - besides the Fed of course - which continue to suggest a lot more scope to the upside than downside. The first is that it's a stealth bull market.

Five years on the make now and still almost no one notices or quite grasps what is truly happening. It has been the most consistently rewarding place to be since 2000 in spite of the recent comeback on Wall Street and the outperformance of some offspring commodity plays. It went up when the Dow went down and kept up with the major stock market averages as they rallied in 2003. Underlying its advance are the very monetary factors that have fooled everyone else into thinking the recovery is for real.

The second is that the declines are still sharp enough to keep the faint of heart away. The market has done this all the way up. For years we've seen it suffer sharp one day or one week drops, only to take them in stride and move higher again. Buying the dips has been a winning formula, but most people are still scared of them - usually healthy.

The third is that there's so much downside in the stock market. If we're right about that and a bit early nevertheless what could be happening now is like what you hear happens when a Tsunami approaches - the tide gets sucked out then whoosh it comes back!

We pointed out in our Monthly Review that while gold had been advancing all along it wasn't until the 1973 high in the stock market averages was in that it went straight up and more than doubled in the next year while the Dow and S&P 500 sank to new lows faster than before. You can bet nobody expected that then.

Whoa horsey, and we thought the election campaign was nasty.

The controversy over the new streetTRACKS bullion ETF is heating up another round of good old fashioned infighting... not so quiet for a (continuous) quiet period. It was discovered that the gold fund's holdings were reduced by some 15.6 tonnes (500,000 ounces) on Tuesday to 88 - that's the day before the big plunge yesterday:

By David Elliott
Dow Jones Newswires
Wednesday, December 8, 2004

LONDON -- The 3.5 percent fall in the price of spot gold Wednesday may have been encouraged by the sale of 15 percent of the gold held by the StreetTRACKS exchange-traded fund, or ETF, analysts in London said. The total net asset value of gold in the trust stood at 88.02 metric tons Wednesday against 103.56 tons Tuesday. Gold fell to $436.90 a troy ounce at the London fix Wednesday afternoon against $451.80/oz Tuesday afternoon. While most participants agree the market was primed for a slide -- in light of an overbought technical picture and a bounce for the dollar -- they also believe the fall in tonnage in the StreetTRACKS trust was responsible for some of the selling.

Bill Murphy (GATA) was all over it; and even wondered whether it was an "adjustment of phantom inventory" prompted by a panicky WGC after James Turk shed light on the fact that some gold bars were listed twice (or that they had the same serial numbers).

Apparently it is said to be common practice.

From an open letter written by one David Walker decrying GATA and retracting his written but undelivered "donation," published by Ross Norman (

"There are no duplicate gold bars, only duplicate numbers. The bars in question are JM bars and JM (Johnson-Matthey, UK) has reset the stamp spools several times. While the serial numbers of the bars themselves are the same, the dates of manufacture are different, as is the weight of the bars. The serial number stamps only go out to 5 digits and thus on a 400 ounce bar, only 124 tonnes could be cast before the spools have to be reset. It is a common practice for the refiner to reset the spools but there will not be identical numbers having the same date of manufacture" -

So two bars can have the same ID but must have different dates.

Okay; but the auditors or WGC should probably have disclosed that somewhere, and maybe Turk should know something about auditing gold bars since he runs a gold bank of sorts. He just might. According to a letter Murphy published at Le Metropole written by HSBC (the fund's Custodian), which was passed along to him by a bank executive / reader, the stamping that Walker alluded to above is a one time affair due to Johnson-Matthey's reshaping of "Good Delivery gold bars" during 2002.

Murphy is still trying to verify the letter.

Addendum: after publishing our letter to clients Mr. Turk contacted us to point out that in a letter from Johnson Matthey addressed to the WGC (published by TheBullionDesk here: Johnson Matthey Letter) regarding the JM "London Good Delivery Bars" (dated 08 Dec 2004) the author confirmed that prior to 2002 the bars were marked with a different two letter code each year (that is, a bar from 2000 could have the same serial number as one from 1999 but it would definitely have a different two letter pre-fix); after 2002 the Matthey letter said the company replaced that system with the exact year preceding the serial number, so that instead of "CT 12345," for example, it might be "2000 12345." However, the author of the letter was also explicit that both the prefix "AND number combination need to be taken into account to identify the bar." But, Mr. Turk noted that "the pre-fix to the bar number was not recorded by GLD for some as yet unknown reason." I assume he'll be checking on that. It may be a dead end and all may work out fine but I'm happy someone's doing the leg work and looking into the details! Aren't you? If his allegation's turn out unfounded that truth will ultimately float to the surface. Confidence implies a process - this is it.

Anyhow, the tiff took an interesting twist when Ross Norman ( charged that James Turk ( caused the plunge on account of his irresponsible claim that the WGC was double-counting gold bars, thus undermining confidence in the integrity of a product that promises to promote gold investment demand. Unfortunately, the article disappeared - or at least the link to it changed because this is where it used to be:

However, we have GATA's amused reaction and Mr. Norman's main punch:

GATA Crashes Gold Market; Bonds Are Next! today more or less accused GATA of causing today's smashing of the gold price. The accusation came in a brief market note by the site's proprietor, Ross Norman, suggesting that the World Gold Council's new exchange-traded bullion fund had been forced on Tuesday to sell 15 percent of its gold holdings on account of "a foul attempt by a rival to raise ill-founded concerns about the product" -- that is, GATA's call this week for the council to explain the duplicate serial numbers on some of its gold bars and to answer several questions about the fund's operation - GATA

Now boys.

If people are selling the fund because of Turk's research then the fund or someone representing it should come out to answer his concerns, for the sake of shareholders.

Nobody can fault him for being wrong because it is a worthy observation even if it is wrong in the end; only the issuers and trustee can be blamed for not heading off the potential crack in the floor. Moreover, as John Brimelow pointed out, the open interest figures don't jive with the action in GLD (the ETF) - see the graph of GLD's gold holdings above. He also observed that two unlikely allies have come to GATA's side:

"...the gold world is being enlivened by huge rows on the ETF, much exacerbated by the foolish attempt by the instrument’s sponsors to dodge debate - quite impossible in the era of the internet. While the custodial arrangements and the strange story of the duplicated gold bar serial numbers are important questions which need to be addressed, more significant from the standpoint of short run gold market analysis is the is the very odd behavior of the reported outstandings.

As Barclays puts it this morning:

"…the much awaited US gold ETF, StreetTRACKS, has reported a fall of 15.6 tonnes down to 88.0 tonnes - this followed a surprising week of no changes in the gold held in the trust despite large trading volumes being recorded."

15.6 tonnes is 500,000 ozs, a very nice round number. The ETF is not at all showing the pattern of the Comex gold contract, where open interest should surely be analogous. Andy Smith has put out a weekly for Mitsui suggesting that market maker manipulation is the cause:

"It doesn’t take even a cynical judge to suspect that this is not a miracle, but the market maker absorbing genuine mismatches in buy-sell orders and maintaining a still life picture of gold held for the public gallery."

Further suspicions as to the integrity of the gold market are most unwelcome."

The bottom line is that these guys (GATA) are genuinely concerned about the quality of a product that everyone (us included) says will promote gold demand.

Nobody wants another BreX, right?

...Well maybe on the ground floor.

In any case, they've posed questions that haven't been answered and are being scolded by people who mock them as conspirators on the one hand yet assign their influence a Soros-like quality on the other. GATA's concerns rest mainly with 1) their suspicions about the integrity of the WGC (implying that it has an interest in the government's rig job against gold), 2) the lack of transparency in the auditing process and the SEC's lesser requirements of it than other funds, and 3) the role of the Bank of England (conflict of interest?) who we all consider an infamous institution in the gold wars.

Perhaps it should be noted that UBS, the underwriter and market maker for the deal (and potential member of the "Cabal") is also a paid sponsor for

The double counting charge just highlights the weakness in the auditing process.

I might add a future concern.

If selling 15 tonnes causes a panic at this stage of the game, wait another five years when these funds have accumulated 10 times as much gold. I believe they will promote gold demand now, but might some day represent an overhang that dwarfs that of central bank coffers today - perhaps like the specter of foreign holdings of US Tbonds.

Like Soros used to write, all bad ideas start out as good ones.

Regarding the Bank of England, David Walker wrote:

The Fund has no relationship with the Bank of England. The Bank of England was listed as a POTENTIAL subcustodian that the Custodian MIGHT use in the normal course of business. Certainly HSBC being the largest LBMA member would more than likely have dealings with the BoE from time to time. During my conversation with the Fund representative Mr. David Smith, he mentioned that there has been talk of discontinuing the BoE as a POTENTIAL subcustodian.

Anyhow, I went through the prospectus last night, and it occurred to me while I was taking notes that these funds indeed may one day hold more gold than central banks do today. In fact, they might just end up owning the CBs' alleged gold.

But I got to thinking, if I were one of these central bankers and was running out of gold to sell, the main question would be, how to tap the various pools of gold that will form as a result of the popularity of ETF's and Trusts (as a result of their inflation really)?

Is it possible? But first, the way it works:

Each share of the StreetTRACKS ETF is "designed to track" the value of 1/10th of an ounce of gold - at least from inception (according to the prospectus the shares "represent units of fractional undivided beneficial interest in and ownership of the Trust"); it is margin and short sale eligible; trades on the NYSE under the symbol GLD (the graph here is backdated to reflect 1/10th of an ounce of gold); and it is a "continuously offered investment trust," which means that it's a permanent new issue (which is why the WGC can't say a peep).

It trades just like any other stock in terms of exchange rules.

The fee for managing the passive fund (aprox 0.40% of the daily "adjusted net asset value" + about US$700,000 in annual administration costs) is collected by selling a small fraction of the gold so that the amount of actual gold each outstanding share represents declines over time whether they are newly issued or not. In the hypothetical example provided in the prospectus, for instance, the effect it would have is to reduce the amount of gold a share represents by about 2 percent over a five year period.

Is it Possible to Redeem Borrowed Shares?
That's the question I couldn't find a definite answer to in the prospectus. The creation and redemption of shares is done by registered dealers (and banks) conditionally in blocks of 100,000 shares. In other words, if your broker is a participant, it can basically order 100,000 "new" shares, or it can redeem its share position for cash or gold in kind.

This opens up a lot of doors, like the management of gold demand (flows).

But the key as far as CB's (or other potential manipulators are concerned) is how to influence a market that you don't really have a position in. Hence, what's to stop someone from borrowing 100,000 shares and instead of selling them (as is customary in a short transaction) they are redeemed either for cash or gold - if cash the fund must liquidate the gold, if in kind the borrower can liquidate the gold or divert it to whatever short term needs necessary once received? At any rate, the only explicit reference to short sales in this connection that I could find was on pp. 73 in the prospectus:

In connection with this offering, the Purchaser may engage in activities that stabilize, maintain or otherwise affect the price of the Shares, including:

  • stabilizing transactions;
  • short sales; and
  • purchases to cover positions created by short sales.

Stabilizing transactions consist of bids or purchases for the purpose of preventing or retarding a decline in the market price of the Shares while this offering is in progress. These transactions may also include making short sales of Shares, which involves the sale by the Purchaser of a greater number of Shares than they are required to purchase in this offering, and purchasing Shares on the open market to cover positions created by short sales.

The "Purchaser" is UBS. These are just typical market making duties of course.

But if anyone knows of any reason that borrowed shares could not be redeemed (a tactic that could be used to pressure the gold market by participants that don't have easy access to physical any longer yet lots of access to paper money/margin) please let us know because the fact is, these pools of gold that will form with the help of products like GLD are attractive targets for plunderers to plunder, if there's a way.

Edmond J. Bugos

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