George Bernard Shaw, 1928
In recent months, while GLD has generally sold at a slight discount to net asset value, other bullion funds with more transparent and credible custodial and auditing procedures have commanded significant premiums. E.g., Central Fund of Canada (CEF), Central Gold Trust (GTU), Sprott Physical Gold Trust (PHYS). Anecdotal evidence also continues to surface of premiums for spot delivery of physical metal or cash settlement in lieu of physical.Here is the link to the full report - please take the time read it thoroughly: LINK
Gold forward rates as reported by the London Bullion Market Association (www.lbma.org.uk) have remained positive territory, but accompanied by sporadic negative lease rates at the shorter maturities. See Gold Derivatives: The Tide Turns (5/25/2009), and materials cited. At the LBMA, therefore, gold continues to avoid backwardation, but only because central banks continue to lend at historically very low lease rates.
It is a strange situation. Gold for spot delivery and bullion funds with high credibility for physical possession of metal in the amounts claimed are selling at premiums over paper of lesser reliability. But where gold is arbitraged against currencies on the basis of relative interest rates, it remains in contango. Freer private markets are increasingly disconnecting from more regulated and controlled official markets. Backwardation is arriving in gold, but ass backwards. Of course, nobody should be surprised. That is the way central banks typically operate.
For the record, until GLD can prove that its Custodian AND the subcustodians possess every single bar of gold listed on GLD's website - that these bars are not just paper swap transactions with U.S. and European Central Banks, GLD shareholders are highly exposed to an Enron/Refco/Bear Stearns type of price collapse. The instant a big holder of GLD tries to exchange its shares for a couple hundered tonnes of GLD's gold -and GLD blinks and hesitates on the delivery - the price of spot gold will shoot to the moon and the price of GLD will have an "air pocket" plummet.
A long-time investment advisor colleague of mine remarked that he had put his clients in GLD today. I replied, I hope you are not holding GLD when it's exposed. He replied that he needed the relative liquidity of GLD for the size he was buying. I replied that the second GLD is exposed, GLD will go "no bid" and the only thing liquid will be the brown substance in your boxer shorts. Not only that, your phone will start ringing off the hook from lawyers who are filing "breach of fiduciary duty" lawsuits.
For all you GLD loyalists, I have just one question: "Do you feel lucky, punk?"