Friday, April 16, 2010

Goldman Sachs Fraud Charges and the Effect on Physical Gold and Silver

I suggested to some colleagues earlier that, ulitmately, this Goldman Sachs derivatives scandal will further hasten investor distrust of paper "assets" and most likely accelerate the ongoing large flow of capital into phsyical gold and silver (and the movement toward investing strictly in gold/silver vehicles that offer verifiable, authentic custody) and ultimately cause the price of gold and silver move a lot higher.

The market itself has offered us an interesting way in which to measure this view today.  Take a look at the price of GLD and PHYS.  I'm basing this on market prices at 12 p.m. Denver time today.  GLD is down about 2.5% and PHYS is down about .6% from yesterday's close.  Why would this be the case?  They both are vehicles which invest exclusively in gold (or so GLD claims), they both permit big investors to exchange their shares for delivery of gold and therefore they should both perform in-line with the price of gold AND in-line with each other.

But we know better than that about GLD.  GLD is a paper Ponzi scheme and all credible allegations of this have gone completely unchallenged by the sponser and trustee of GLD (see my report on this here:  GLD is dubious.  On the other hand, Sprott's PHYS buys 400 oz. LBMA gold bars and safekeeps them at the Royal Canadian Mint.  If you go through their prospectus, PHYS prospectus, you will find that the bullion is held exclusively in a segregated account and Sprott can go inspect it pretty much on demand.  That is not at all possible with GLD and the GLD prospectus prevents that from happening.

Anyway, let's go to the true test, which is the market.  The PHYS stock price trades at a premium to its underlying Net Asset Value.  You can track this here:  NAV.  GLD simply indexes the price of gold, less some concession for the expense of running the trust.  As of yesterday, the PHYS stock closed at an 11% premium to its NAV (there are several reasons for this, but mostly because of the way the prospectus is structured).  At noon Denver time, when the price of gold was getting slammed with the stock market, GLD was down 2.5% on the day, while PHYS was down only .6%.  The reason for this is that the premium on PHYS expanded to 16%.  The only explanation for this is that investor money flowed into an asset that is verifiably backed by physical gold.  It's the only explanation because, all other things being held contstant ("ceteris paribus" for you economics jockeys), GLD and PHYS should have declined by the same percentage.

This is a perfect market laboratory in which to measure the true differentiation between GLD and PHYS - between a paper Ponzi asset and REAL GOLD.  Remember:



As a matter of fact, a good friend of mine yesterday sold his GLD position and bought PHYS at exactly the same time.  Today his PHYS is actaully up 10 cents from where he bought it yesterday, whereas GLD is getting decimated.  Got gold?  Are you sure it's the real thing???


  1. hey guys i trade this space..i already looked into this ..YOU CAN NOT BORROW PHYS. I CALLED MY PRIME BROKER THE HAD 10K SHARES OF PHYS TO LEND AND I HAD TO CALL THE HOLDER TO NEGOTIATE A RATE..HE WANTED NEG 50% so that is a huge reason u can't arb it . and of course in the end physical wins

  2. Interesting. Thanks for the color. At least we know it's probably not being naked shorted.

  3. this is somewhat like a) CEF/GTU which trade at a premium and of course the real deal which trade at premiums.

    PHYS is new so its taking some time to get up to speed--the best time to buy it since premium appreciation (does that make sense?) lies ahead(or should)

  4. The markets are pretty much yawning at this GS news. And as usual, gold's getting taken to the wood shed. You'd think the opposite would happen when a paper scandal is exposed. It seems this whole thing was telegraphed for perception's sake ("Hey look at us, we're the SEC! We can surf porn with one hand and regulate with the other!")

  5. I wouldn't be surprised if this wasn't highly orchestrated between the adminstration and Wall Street/GS. I'm sure there's been enough heat applied by constituents to Congressmen and by Congressmen, especially Democratic ones, to the White House, that something had to be done.

    It would appear that the case against GS itself is flimsy other than maybe risk control negligence. Sounds like the stoolie on London will be put up on the cross and executed. Then life will go on and Obummer can rattle on arrogantly about how he's cleaning up Wall Street and reform the SEC.

  6. "Obummer can rattle on arrogantly about how he's cleaning up Wall Street and reform the SEC."

    Exactly, Dave... everything done through mainstream media these days is just kabuki theater on steroids-- put on a show to try and tame the angry mob, maybe they'll fall for it.

  7. 2 things would kill the banks immediately:

    1) restore mark to market

    2) Volker rules on prop trading.

    thats all of the banks profits right there.

  8. Typical panic moves by the so called "looking far ahead" wall street. Gold was sold because some felt if Paulson gets in trouble he would sell off his gold holdings to make a capital infusion should he need it. Unlikely in my thinking, but why not make a kneejerk reaction based on zero facts.

  9. I think zerohedge propagated that story and it's a stupid one. Gold was knocked down hard by the cartel as they used this as an oppornity to trigger large spec black box stops. Seen this a zillion times in the last 8 years - wash, rinse, repeat.

    The fact that the bullion banks are willing to operate so boldly and openly like this tells you that the CFTC has already told them to ignore the hearings 2 weeks ago and carry on with corruption as usual.

  10. Dave, this has got to be by far the most asinine f'd up reason for the usd to rally against other currencies.

  11. anliu, the trading in the dollar and the stock market is absurd. I think a lot of it has to do with black box algorithms, high frequency trading programs and the Fed's ability to manipulate both.

    I mean, how the hell does gold get hit on news that should send everyone running for the exits on their paper securities positions.

  12. gyc, you going beef ribs this weekend?

  13. How quickly people forget,
    [SEC Names Goldman’s Storch as Enforcement Unit Operations Chief]
    This is nothing more than lip service... Obummer throwing a bone at the middle class for the upcoming elections.

  14. Agree anliu - thanks for the news link. I mentioned that to someone yesterday about that kid. That's why I think yesterday was nothing more than a dog and pony show that will lead to a meaningless wrist-slap but lets Obummer exploit the situation for the benefit of the uninformed

  15. This is the way these criminals bring closure to massive fraud. Small fine compared to the crime and case closed.

    The uninformed are legion and Gold, Silver and Wall Street are not even on their radar. The only way they see reality is when the system implodes and they are on the street homeless and hungry.

    Joe M.

  16. "As a matter of fact, a good friend of mine yesterday sold his GLD position and bought PHYS at exactly the same time. Today his PHYS is actaully up 10 cents from where he bought it yesterday, whereas GLD is getting decimated. "

    Your friend is going to lose (on top of the extra round trip transaction cost). If you are really his friend, you'll tell him to unwind that trade pronto.

    The Ponzi scheme is not in GLD with its audited bars of gold trading at NAV, but in the CEF with its audited bars of gold trading at greater than a 13% premium to NAV.

    Being up 10 cents so far must feel as good as having bought in October of 99.

    If Sprott continues to see a high premium on PHYS, he'll take care of the arbitrage himself by purchasing more gold at the Comex spot price and issuing more shares. It would literally be a risk free arbitrage for him.

    I don't know where you learned about investing, but the purchase of an asset at a premium well above that offered by the local coin dealer is not sound investment advice.

    You wrote:

    "PHYS is new so its taking some time to get up to speed--the best time to buy it since premium appreciation (does that make sense?) lies ahead(or should)"

    Recognizing that an asset is trading above NAV, continuing to purchase said asset under the belief that others will follow and trade it at an even higher premium to NAV - is charitably called the "greater fool theory", but it is really the basis for ponzi finance.

    It is quite funny to me that you are railing about GLD being a ponzi scheme, and yet egging people on to purchase an asset for literally more than a 13% premium above fair value, because you think that there will be others who will later drive up this premium even more (in spite of the fact that Sprott himself could make quite a bit of money by arbitraging this premium away)! The irony is quite rich, the returns however (at least compared to just buying any other gold related asset trading closer to NAV) will be quite dismal.

    I get that you like gold, especially the physical variety. I get that you don't like paper assets. Getting people to buy over-priced paper assets that can be converted to physical however is just stupid, and they're going to eventually lose money on the trade (and probably be pretty pissed with themselves for being foolish enough to listen to you, or just pissed at you).

  17. Heh heh hehhh. GLD audited? That's a joke. That's like saying Madoff was audited. I've covered this in previous posts and comment sections so I'm not going to go in depth, but the bars in GLD are not audited. The bars held by the primary Custodian - HSBC - are spot-checked, supposedly, by an assayer firm, but they don't count all the bars nor do the veryify paperwork/serial numbers. Go look at the auditors report for the latest GLD financial filing. The auditor audits the financial paperwork provided by the trustee and custodian. There's no audit of GLD and a big shareholder can't knock on the Trustee's door and demand to see the gold. Know why? Because the Trustee can't do that to the Custodian. Sprott can go once a month and look at and count ALL of its bars. Most people just have no idea how valuable that option will eventually become.

    'Nuff said there. Just going by the market, not interpretation, from time to time the premium on CEF has gotten to be as wide as 30%. This usually correlates with periods in which the physical market gets tight. And we've had some periods in the last 9 years when coin premiums on silver eagles have gotten to be up to 40% and on gold eagles as wide as 15%.

    I predict that sometime down the road the system will be awash with so much paper money that people will be willing to pay double the Comex spot price for physical. I'm not alone in this view. So paying 13% right now for PHYS isn't so bad. And PHYS is being accumulated by big investors, so go make your arguments with them. They determine the market at the margin, not me.

    When the lid is off GLD's Pandora's Box, the price of GLD will plummet while the price of gold spikes higher. GLD is a fraud and plenty of people of higher stature than me have made those allegations publicly. GLD has NEVER defended itself. Wanna know why? Because the proof is in black and white and is called the GLD Prospectus.

  18. Hows that percentage working out today on GLD vs Phys. Just curious? Thanks.

  19. Still outperforming thursday's close by over 1% if you had sold GLD and bought PHYS on Thursday.

    It's quite sophomoric/amateurish to examine the relative performance of GLD vs. PHYS on a day to day basis. The overall thesis is that paper backed by verifiable, 100% physical gold will outperform paper backed by SHIT over the long run.

    Quite frankly, the only true way to experience the true attributes of holding gold is to keep the stuff phsyically under your bed. Even PHYS doesn't protect you if you don't own enough shares to take delivery of at least 1 400oz. bar