Monday, November 4, 2013

How Much More Gold Can They Drain From GLD Before It Loses All Credibility?

And thus I clothe my naked villainy
With odd old ends stol'n out of holy writ;
And seem a saint, when most I play the devil
           - Shakespeare, "Richard III"

We have witnessed a stunning drain of gold from the GLD ETF trust.  Through last Friday, an incredible 479 tonnes - more than 35% - of GLD's gold has been removed and has disappeared, most likely to Asia - in the space of about 10 months.  The biggest chunk of that 479 tonnes was removed shortly after Germany's Bundesbank issued it's feeble and hopeless request to the U.S. that the Federal Reserve start shipping back some portion of the 1500 tonnes of gold that is supposedly being "safe-kept" on behalf of Germany by the Fed in its vault in New York City.   Gold luck, Angela...

I have looked at GLD suspiciously ever since James Turk issued the first analysis of GLD's prospectus back in 2004.  Those of us who are familiar with securities laws and investor "safe guards" supposedly enforced by the SEC were absolutely shocked that the SEC approved the GLD prospectus as it was filed because of the egregious lack of GLD sponsor and custodian legal accountability standards typically required by the SEC for publicly traded securities.

Given this fact, I believed at the time that GLD was a scheme devised to suck  in retail and institutional cash that might otherwise flow in massive quantities into actual physical gold that would be safe-kept in private vaults in this country.  Although GLD has a mechanism to enable investors with a minimum of 100,000 shares to convert those shares into gold that would be delivered to the investor, the procedure is exceedingly cumbersome and expensive and there's a mechanism embedded in the language of the prospectus that enables the trustee of GLD to deny such requests.

But I also knew - through GATA's invaluable research - that there would eventually be a shortage of physical gold that would be available to allow the western Central Banks and bullion banks to maintain their oppressive and incessant manipulation of the paper gold market for the purposes of maintaining a cap on the price of gold, for the purposes of defending the credibility of the U.S. dollar.  I figured that at some point the gold in GLD would used for this purpose once the Central Bank stocks of gold were largely if not fully depleted.  In this context, please recall that about three years, the ECB system, which had been selling 400 tonnes per year on average, pretty much stopped selling any gold.  That's sign-post #1 that I was right.

Then along comes the Bundesbank in early 2013, with a request that the Fed start shipping Germany's gold held in in New York back to Germany.  That's when all hell broke loose:

(Please note:  the original graph is from the TF Metals Report. I sourced it from my esteemed colleague, "Jesse," of Jesse's Cafe Americain.  Solid circle edits are mine to enhance visual readability of the chart.  Jesse's original post can be read here: Collapse in GLD gold holdings).

There's something really wrong with that picture because the intuitive response from the market by Germany's request of the Fed should have been a quickly rising price of gold.  But as you we all know, the Fed defaulted on the request - for all intents and purposes - and that's when the massive drain of gold from GLD commenced. 

The truth is that my original hunch was correct.  100% correct.  The gold in the GLD trust is being used to satisfy the enormous physical delivery demands from China and the other big gold buying countries because the western Central Banks have run out of gold to deliver.  That is an unmistakable fact. Reports and data ad nauseum have been published in the last six months describing and verifying the voluminous, unprecedented amount of gold bars that have been moved - literally physical transferred - from the Comex in NY and  the LBMA and Bank of England vaults in London to Switzerland and then on to Hong Kong, where it flows to its ultimate destinations in China.  Anyone who would deny that this is the case has a blatant and catastrophic disregard for the truth as supported by provable facts.

So the question is, how much longer can the depletion of gold from GLD continue before this scheme falls apart?  Let me first say that it is likely that the U.S Government's "Waterloo" in this situation will be the gross miscalculation - when GLD was originally devised - of the growth and size of China's appetite for physical gold for which actual physical delivery is demanded.

With that in mind, my best guess is that if the gold in GLD were to be depleted by another 35% from here, the largest remaining shareholders of GLD would likely start exercising their legally ambiguous "right" to convert their shares into physical gold and have that gold delivered out of JPM's custodial vault and into their possession.

Think about the Hobson's Choice faced by the sponsor, trustee and custodian of GLD:  if they don't honor shareholder conversion requests to convert and deliver gold, it will send the "default" signal to the world that indeed GLD is a fraud, that GATA has been right along.  The price of gold will literally go straight up, "bid without"  - meaning huge bids will appear at much higher levels and there won't be any offers.  The other side of this "choice" is that it is likely that the physical gold - at that point in time - to honor such requests is actually not available in HSBC's vault to be delivered and the trustee will attempt to settle in cash.  Gold goes bid without.

At this point there's really no telling just how much longer GLD can be drained of gold before the western Central Bank/BIS fiat paper gold system inevitably collapses, but with each passing day of increasing awareness and understanding of what is happening with the world's physical gold vs.the derivative paper claims on that gold, and with each additional day the LMBA GOFO rate is negative, the time to collapse is quickly shrinking.  I do believe that, in what ironically was devised as a "fool-proof" tool manufactured to allow the west to "manage" the physical gold vs. paper problem for a long time, will likely be the Icarus wings of the U.S. Government's fiat money scheme.

Note:  I am in the processing of revising and updating my original analysis of the GLD trust and why the shares in ETF are fraudulent - stay tuned...


  1. That they've been able to continue this charade for so long is mind boggling.

    Just asking for an audit of alleged gold holdings gets you labelled a nutter. They like it that way I suppose.

  2. michael schumacherMonday, 04 November, 2013

    "The gold in the GLD trust is being used to satisfy the enormous physical delivery demands from China and the other big gold buying countries because the western Central Banks have run out of gold to deliver. That is an unmistakable fact. "

    Ah no its not.......your assumption is that it was there is the first place. Ever wonder why ETF's grew like weeds in ' control.

    So using your logic it was there in the first place (wrong on so may levels) and that its now being used physically to satisfy the Chinese demand. Why would they even bother? Now them purchasing the building with JPM's "vault" tells a different are smart you can figure out why....

    1. Michael, then from where is the gold coming that is being delivered into China? China alone is importing gold at a rate = to the world mining output supply. India is still importing a lot of gold via smuggling, Turkey's gold imports are like 3x last year's - same with several SE Asian countries.

      You can ever maintain that GLD never had gold in it to begin with and hope to be viewed with any kind of credibility. I've been one of the early proponents of the GATA proposition that most of the physical gold being reported is not really there. But I have no doubt that GLD has always had at least 50% of the gold that it reports as having.

      I also am one of the few people who have thoroughly scrubbed every syllable of the GLD prospectus. I think I have a pretty defensible position on what GLD is.

    2. michael schumacherMonday, 04 November, 2013

      was never there to start with.....and this is not about credibility as its wayyy past that.
      This is about believability and they think people will "believe" whatever it is they want to be told.

      GLD......nothing more than paper product supported by an exchange that has already told everyone that all of its reporting is based on "what ifs".

      Just like LIBOR.....nothing more than a survey.

      "I have no doubt that GLD has always had at least 50% of the gold that it reports as having."

      Looking forward to seeing you prove that. Where is it?

    3. Ok dude. Enough. I've studied you long enough to know that you are the type of person who has to have the last word no matter what. That's fine and consider your comment above the last word.

      I'm too fatigued from this market to debate over the legitimacy of GLD. My blog post stands as my view. Most people, including people who have an even better of the London and Asian gold flows than do I, have concluded that the gold has to be coming from GLD.

      Enough tail-chasing and circle-jerking on this. If you want to present a comprehensive analysis of your view, it's really easy to start your own blog.

  3. Dave

    One point that I wish your view on.
    When Central Banks lease Gold, how often (if at all) do they relinquish physical custody?

    Jim Richards infers that they give out paper receipts to the Bullion Banks, however the Feds stonewalling Germany seem to indicate otherwise.

    1. I don't know that the gold is actually in the Central Bank vaults to even be relinquinshed - at least in any kind of meaningful size. Sure they can show up nice glossy pics of the gold in the vault, but the amount they show is tiny compared to the amount that's supposed to be there. I'd like to a full blown independent accounting with a live video of the gold that is supposedly held in "deep storage" at West Point.

      The Fed guards its information about what's really going on with blood-money secrecy. Bloomberg currently is engaged in a FOIA fight with the Fed to get them disclose information about their gold swap activities and the Fed has been spending a ton of paper money to defend their right to not comply with the FOIA request. I believe the case is either in the appellate court or is waiting in the multi-year line at the SCOTUS

  4. Thanks for the trenchant analysis, Dave.

    1. Thanks! Love the word "trenchant."

      You the Paul Warfield who was a WR for the Dolphins?

    2. No, though I am old enough to have been a fan of his! What a graceful athlete.

  5. Thanks for your efforts to make sense of this shit show for us all Dave...

    BTW, what do you make of the collapse of SGE premiums vs Comex spot? William Kaye stated on KWN that his sources are saying that Chinese officials demanded an end to the bank's profiteering at the expense of China buyers... do you think this is the case? Makes sense to me. Thanks, 1 kg Lunar Dragon

    1. No. I think the plebian view of the gold premiums being paid in Shanhai are misdirected. I think John Brimelow's view - which he publishes in the high-end "gold jottings" gold report, is the best explanation:

      "In an efficient gold importing market premiums should not rise above the level required to mobilize the capital to finance the trade. It has never been obvious the JBGJ why Shanghai so often runs double digit premiums. The current level could be adequate."

      In other words, premiums are high when London/Switzerland don't have enough gold to satisfy demand on the SGE. Lately deliveries have been very large on a daily basis, which also happens to be correlated with the large amount of gold that was drained from GLD toward the end of last week.

      When the premiums shrink like they have, it means the gold that is demanded is flowing normally into Shanhai - for now anyway.

    2. Dave,you need to consider the possibility that deliveries from Switzerland increased because the Chinese authorities were unhappy with the premiums,which really represented arb profits to the BBs.

  6. Investors are not able to redeem physical Gold from GLD even if they hold 100,000 shares. Only Authorized Participants can:

    "Authorized Participants are the only persons that may place orders to create and redeem Baskets; the Trust does not deal directly with individual investors."

    If GLD does have the physical Gold they claim (I believe they do and by your explanation of the metal flowing from GLD to elsewhere, you appear to concur), then what was the benefit of "sucking in" retail investors? What difference does it make if they buy GLD or privately store physical if GLD really has the Gold?

    I addressed the German Gold situation in this post:

    In my opinion it was Bundesbank who set the rate of repatriation (circa 50 tonnes per year).

    It is not an unmistakable fact that western Central Banks have run out of Gold to deliver and if you think that is so then the onus on you is to provide proof. And real evidence does not consist of:

    - Coincidental drops in Gold stocks (Comex/GLD)
    - Sharp rise or fall in the Gold price
    - The lack of a recent audit

    None of this is evidence that can lead to a factual conclusion. If you believe that it points to a likely outcome, then that is your opinion and you are welcome to it.

    1. Yes I think everyone by now knows that only Approved Participants are permitted to exchange shares for physical. But that does not preclude big institutions using AP's to do that. I just don't think any are smart enough to try that and the GLD protocol for doing that and removing the gold from HSBC's vault is quite cumbersome.

      As for the amount of physical gold in the trust. I never said there is full coverage. There is not even close to full coverage. For starters, there is nearly 24 million shares of short interest, which translates into about 68 tonnes of gold that is not in GLD. That means GLD is underfunded by at least 8%.

      Now, I wrote an analysis on GLD back in early 2009 - which I'm starting to revise and update and will publish probably w/in a month - in which I state outright that I would bet the actual coverage is maybe 50%. You'll have to stay tuned for reasoning and analysis on that.

      The bottom line is that belief or disbelief in GLD rests on "faith," just like religion. If you have faith GLD is the one business line in which State Street (marketing agent), BNY Mellon (Trustee) and HSBC (custodian) all conduct their accounting and business ethically and honestly, then bless your soul. I know that all three are vile, corrupt banks and that corruption infects every aspect their of operations. GLD is no exception, unless of course you!

    2. Your analysis is utter tosh. The Bundesbank sets the rate of 50 tonnes per year because of logistics problem? Give me a break! Germany is a country and she has a navy, which consists of 13 frigates, 5 corvettes, 8 fast attack craft, 5 minesweepers, 11 minehunters, 4 submarines, 22 auxiliary vessels and 15 miscellaneous vessels. Germany can use her navy to ship the 300 tonnes of gold. Besides that, the US Navy, which has 10 aircraft-carriers can also help to ship the gold with Germany covering the expense. I don't think Germany will grudge paying for the expense as it already spent billions to bailout the PIIGS. And if 2 navies and thousand of soldiers can't defend the paltry 300 tonnes of gold, Russia consider moving her border to the English Channel.

    3. LOL. Bullion Barron's claptrap is typical apologists' spin for TPTB and beyond ridiculous and moronic.

    4. Anonymous, it's not only the logistics of shipping, but also testing, melting and recasting the bars received. Bottom line, if the Bundesbank trusts the Fed to send the Gold over the 7 year time frame, then why move their naval fleet to do it, presumably there are much cheaper ways of going about it. There is no rush to move the Gold, so why rush? The small amount they are repatriating from the US (relative to the amount they are keeping in the US) is small change and I suspect more so a political stunt than anything else. Does repatriating 8% of of their Gold from the US, while leaving 37% there sound like they have trust issues?

      What is the alternative analysis that you bring to the table?

    5. Testing, melting and recasting lead to the 7-year decision? Have you ever been to a refinery? Testing, melting and recasting are NOT time-consuming. It only takes up to 90 minutes to produce a 400-oz bar 99.5% fine from dore bars(80%-90% gold) with the Miller Chlorination method. And the process will be faster since the gold stored in the US is already assumed to be in 400-oz bars 99.5% fine. Besides that, if Germany trusts the Fed, why test, melt and recast the gold bars to begin with? Just ship them directly to Germany. It will be much simpler.

      To remind Bullion Baron, the US has 45,000+ soldiers in Germany and Germany has NONE in the US. The US has nukes and Germany has NONE. And you think the German decision is NOT strong-armed.

      Next time, if you want to be an apologist, you'd better work harder to find some less ludicrous pretext for TPTB.

      You can have the last word. I don't bother to reply any more.

  7. The one thing I that I can't quite understand is... why are they not also draining PHYS (Sprott's fund)? It makes it easy to withdraw gold and is trading at a discount to the gold price right now. That's the only hole in the "they're running out of gold and draining it from every western source they can find" hypothesis. Please help me fill it!

    1. Good question. For one thing, PHYS only has 44 tonnes in it. If the bullion banks started buying up enough shares to redeem a meaningful amount, it drive the price of PHYS to a big premium.

      Second, the redemption mechanism is completely different. There's no such thing as the anonymity of "approved participants." The bullion banks can remove gold from GLD and ship it to Switzerland for a less than it would cost to remove gold from PHYS and make the same shipment to Zurich.

      But I think the small size of PHYS plus the premium factor if a big bank tried to accumulate a few million shares is the biggest impediment. PLUS, Eric Sprott and John Embry would broadcast it to the world if a bullion bank tried to do that...we really have no idea which bank or banks remove gold from GLD when gold is removed.

    2. That anonymity issue is precisely why the fraud has gone on for as long as it has. I can only imagine what would happen if the CFTC were forced to divulge the names of the parties shorting massive amounts of gold into the market to take the bid stack out when it suits their purpose. What's comical is that this entire Ponzi scheme is still referred to by the Wall Street establishment as a "free market".

      Welcome to the Banana Republic!

    3. Good answer. Any idea why SLV (and the COMEX silver inventories) aren't having the same run as GLD? I'm 80% silver and it makes me a little nervous when there's a run on gold but not silver.

  8. Dave
    I do not if you read fofoa but the conclusions you have reached are similar to those we discuss.
    GLD probably does have gold (they do publish a bar list) and it probably represents the last stash in the West that can be used to satisfy the physical flow that is essential to legitimize the derivatives market. If physical is not there to meet the demands of certain key players then the problem will come to a head.
    At what level of GLD inventory there is panic...who knows. I thought it would happen tons ago.
    How will the displeasure of the scorned be announced? THAT will be interesting. I wait for that news every day.

    1. Man, I try to read his stuff but it's too damn long and dry lol

  9. what about the view that GLD is the place where bullion banks recently parked their reserves. Fiat banks are in the business of lending fiat for a nominal gain in fiat and they hate cash reserves because it is makes them no profit. In fact it's an expense because they have to provide security and storage for it. A necessary cost of doing business because without cash reserves the fractional reserve digital lending could lose credibility as people try to redeem. Bullion banks make bullion denominated loans instead of currency. Therefore they have to hold bullion in reserve at their expense. Then GLD comes along. Bullion banks put their reserves in GLD where they can redeem it at a moments notice because they are the custodians and all of a sudden an expense (holding bullion reserves) became a profit center. Now I think GLD is being drained because bullion banking and paper gold are being wound down. Gold is systematically being returned to big players that pledged it in the first place and the investors that wanted to play the gold game and profit from it's price movements will be settled in cash (probably at a very low currency price and all perfectly legal via the exchange language and contract law). In the end the only people that will get to participate in the real gains to be had from gold will be those with physical bullion in their personal possession.

  10. The Wall Street Code (Marije Meerman, VPRO)

    Published on Nov 4, 2013
    A thriller about a genius algorithm builder who dared to stand up against Wall Street. Haim Bodek, aka The Algo Arms Dealer.

    From the makers of the much-praised Quants: the Alchemists of Wall Street and Money & Speed: Inside the Black Box. Now the long-awaited final episode of a trilogy in search of the winners and losers of the tech revolution on Wall Street. Could mankind lose control of this increasingly complex system?

  11. How Strong Is the Economic Recovery?

  12. "Nevada, whose 9.5 percent unemployment rate is the nation’s highest, plans to sell $572 million in bonds this week to repay the federal government for jobless benefits. It’s the state’s biggest sale since 2008.

    The borrowing would pay down the $520 million Nevada owes the U.S. for bolstering its unemployment fund after the longest recession since the 1930s pushed the jobless rate to a record 14 percent in 2010. That debt peaked at $846 million in 2012.

    Sixteen states and the Virgin Islands collectively owe the federal government $21.3 billion for boosting jobless funds as the national unemployment rate reached a 26-year high of 9.9 percent, Labor Department figures show. Nevada is the eighth-most indebted, with California leading at $9.5 billion.

    “What we’ve seen over the last years is what we think is more of a sustainable road to recovery" (LOL!), Mark Mathers, senior deputy state treasurer, said in an interview from Carson City, Nevada.

    Paying down the debt with the proceeds will save the state about $24 million if current interest rates hold, Mathers said. Five-year benchmark yields were at 1.4 percent as of Oct. 25, the lowest since June 20, according to data compiled by Bloomberg."

  13. Any comments on John Paulson's GLD shares? If what you and GATA said are true, surely he would have withdrawn all his GLD shares and convert them into physical metal.

  14. How the NYPD is in Bed with JP Morgan

    Under some Orwellian concept of citizen surveillance, the very Wall Street banks that proved they were a far greater threat to the United States than any foreign terrorist when they collapsed the Nation’s financial system in 2008, are part of a joint venture with the NYPD to use high-tech spy equipment to monitor the comings and goings of citizens in the streets of Manhattan – the majority of which, unlike Wall Street, are law abiding citizens.

    - Pam Martens, from her recent article: Despite Eight Ongoing Criminal/Civil Investigations of JPMorgan, the Bank’s a Law Enforcement Partner With the NYPD

    Michael Bloomberg made his priorities and strategy quite clear throughout his extended tenure as New York City’s mayor. It is far easier to demonize large sodas, salt and cigarettes than it is to go after the real criminals running wild in Manhattan. After all, why go after your billionaire oligarch finance pals when you can randomly stop thousands of disenfranchised, dark-complexioned serfs toiling in the barrios and forgotten areas of your neo-feudal city in order to look “tough on crime.”

    It’s one thing to target the poor while protecting the very rich. We already know that’s been the central tenet of Mayor Bloomberg’s leadership strategy. That said, it is quite another to have the NYPD work side by side with JP Morgan employees (a company facing eight ongoing criminal/civil investigations) as some sort of law enforcement strategy. Yet, that is precisely what it has been doing.

  15. Chase Isn't the Only Bank in Trouble By Matt Taibbi

    Perhaps most importantly, however, there's a major drama brewing over legal case in London tied to the Libor scandal.

    Guardian Care Homes, a British "residential home care operator," is suing the British bank Barclays for over $100 million for allegedly selling the company interest rate swaps based on Libor, which numerous companies have now admitted to manipulating, in a series of high-profile settlements. The theory of the case is that if Libor was not a real number, and was being manipulated for years as numerous companies have admitted, then the Libor-based swaps banks sold to companies like Guardian Care are inherently unenforceable.

    A ruling against the banks in this case, which goes to trial in April of next year in England, could have serious international ramifications. Suddenly, cities like Philadelphia and Houston, or financial companies like Charles Schwab, or a gazillion other buyers of Libor-based financial products might be able to walk away from their Libor-based contracts. Basically, every customer who's ever been sold a rotten swap product by a major financial company might now be able to get up from the table, extend two middle fingers squarely in the direction of Wall Street, and simply walk away from the deals.

    Nobody is mincing words about what that might mean globally. From a Reuters article on the Guardian Care case:

    "To unwind all Libor-linked derivative contracts would be financial Armageddon," said Abhishek Sachdev, managing director of Vedanta Hedging, which advises companies on interest rate hedging products.

    Concern over all of this grew even hotter last week with the latest Libor settlement, in which yet another major bank, the Dutch powerhouse Rabobank, got caught monkeying with the London rate.

    Read more:

  16. Keep stacking...

  17. And how do you come up with the number 35%?

    1. It's actually 35.82%. All the data you need is available on the GLD website

  18. Can anyone comment on the Forex gold market as it trades over $2.4 billion a day and seems to be the deciding factor in the gold price.

  19. Rhetorical or not, I'd like to get an answer to the question in the title. What is your take? At what point do derivatives suddenly collapse?