NEW YORK (ResourceInvestor.com) -- The World Gold Council’s American exchange traded gold fund [GLD] continues to draw attacks for the way it accounts for the bullion backing its securities. Other critics say it does not achieve what it represents.
James Turk, founder of digital bullion product GoldMoney.com, recently alerted his newsletter subscribers to apparent double counting of gold bars recorded as inventory by streetTRACKS gold shares. He says that 2.2% of the recorded bars, worth nearly $30 million, appear to be duplicates.
An updated list of “London Good Delivery Bars” is published on the GLD Web site each week. The latest list shows the fund owning 8,306 bars representing over 3.3 million ounces.
Meanwhile, Mitsui precious metals analyst and renowned gold “permabear”, Andy Smith, renewed his criticism of the exchange traded funds in a note circulated to clients.
He echoes Turk: “…new securitized gold… offers not gold at all but a paper claim, based on the kind of trust in multiple counterparties [myriad custodians of the bullion] physical gold as most of us knew it naturally avoided. [Trustees own the gold, ‘investors’ own a piece of paper.]
A more severe attack by Smith mocks GLD for failing to grow its gold bullion stockpile despite multi-year gold price highs and rising trading volume in the security. “Early days, true, but GLD has not added any gold to the 103.6 tonnes it took in its first 5 days trading, even as price set new 16+ year highs. … there is no lost tribe of gold investors ‘out there’ to be discovered.”
He attributes the discrepancy to the “market maker absorbing genuine mismatches in buy-sell orders… He can buy GLD at little cost because he is giving up gold lease rates of zero or less if he otherwise left gold on deposit in London. He can sell GLD so long as price rises to encourage ‘investors’ to buy.”
Duplication
WGC gadfly the Gold Anti-Trust Action Committee has taken up Turk’s dispute, and that in turn has prompted e-mails and phone calls to Resource Investor.
On Monday Gata distributed a press release declaring: “World Gold Council's Bullion Fund Double-Counts Gold Bars, GATA Says.” That emphatic declaration was quickly toned down in the introduction where Gata said “it appears” that double counting has taken place because of duplicate serial numbers appearing on the GLD inventory.
Industry sources scoff at the allegation. They say duplicate serial numbers do not represent the same bar as can be proven by the associated weight which is unique to every bar.
We replicated the GLD inventory and ran a few simple de-duplication routines to identify possible double counts. The only notable discrepancy exists in the simple bar count – the list says 8,306 bars are on hand, but we counted 8,307.
We concatenated and then sorted each record to produce a unique “signature” consisting of the bar number, the brand (refinery), gross weight, fineness and fine weight. No duplicates could be found on that basis.
When the list was confined to serial numbers alone, we could identify 78 apparent duplicates, or 0.94% of the total bars recorded. Notably, every one of those duplicates are Johnson Matthey products and the occur in two distinct sequencing clusters. Each “duplicate” is clearly distinct by gross weight, fineness and fine weight.
For example, bar number “1143” appears twice but the first entry carries a gross weight of 393.7 ounces versus 398.22 ounces for the second entry. This serial number duplication is repeated from bar number 1143 to bar number 1182. There is another cluster of duplicate serial numbers in the range 2292 to 2330.
So at face value you have to conclude that if anyone’s at fault it is Johnson Matthey for creating room for doubt by allowing duplicate serial numbers on its bars. However, the uniqueness of each bar is readily apparent.
Market irritant
Ross Norman, proprietor of TheBullionDesk.com, says it is not impossible for duplicate serial numbers to be stamped on to London Bullion Market Association approved gold bars. “It is a remarkable coincidence that the bars have the same number, but they are differentiated by date and weight,” he said, adding that the issue is a non-story that is serving only to irritate the market which has so needed a liquid gold investment product.
Turk disagrees that gold bar serial numbers can be duplicated. He consulted two vaulting experts, one an LBMA member and one an independent service provider, and they contend that duplicate serial numbers may affect silver bullion bars, but never gold.
The dispute originates in Turk’s long-running criticism of the WGC gold funds for the way they manage custodianship of the gold bullion inventory. He says investors cannot be satisfied unless the gold is held in “allocated” accounts and withheld from sub-custodians and sub-subcustodians such as the Bank of England.
He contends that loose custodial arrangements could make the gold funds vehicles for suppression of the gold price, primarily by making bullion available for leasing which equates to shorting the price.
Turk subscribes to the school that believes the gold price is manipulated by a cartel of large bullion banks, Central Banks and gold producers that hedge their production. The Bank of England looms large as a supposed prime mover in the scheme.
An industry source says the GLD custodian, HSBC, has conducted a preliminary inspection of the “duplicate” bars in London vaults and found nothing awry. However, that won’t satisfy sceptics who say no deceit is too large in the gold industry.
Turk says nothing less than a full audit of the GLD stock is satisfactory. “The important point is that gold bars held in a subcustodian and sub-subcustodian are not audited and cannot even be inspected. Consequently, because there is no third party verification, it is impossible to know whether the bars are leased out, or for that matter, whether they even exist,” he warns. “It is a tool that could be used for a scam.
Turk says his criticism must not be misconstrued. “I support a gold ETF, but it must be done right.” He says he held a number of discussions with the WGC about custodial issues, apparently to no avail. “We addressed this problem in GoldMoney; they weren’t interested.”
He says auditing the gold would not be expensive. “The big expense is getting the guy to the vault, not counting the bars. So what if it does cost $100,000? You have a billion dollars worth of assets in there.”
The WGC has avoided commenting on the gold fund in any way for fear of trespassing Securities & Exchange Commission rules regarding open ended securities that are deemed to be a perpetual offering. Turk has no sympathy since he does not believe the SEC would object to clarification or reasonable communication about critical issues.
It is evident that the only way GLD can shake off the creeping doubt, despite the conspiratorial quarters it is coming from, is by producing the “duplicate” bars and showing their provenance. Any bar can be traced to its refinery of origin which would resolve the dispute immediately unless the refinery disavows the bar.
