GLD: Incompetence or "Told You So?"
If it's genuine, questions inspire confidence
- once answered
Ed Bugos
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 (TheBullionDesk.com):
"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" - http://www.thebulliondesk.com/content/reports/temp/
AnOpenLettertoGATA.pdf
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 (TheBullionDesk.com) charged that James Turk (GoldMoney.com)
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: http://www.thebulliondesk.com/ReportItem.aspx?Code=collywog.
However, we have GATA's amused reaction
and Mr. Norman's main punch:
GATA Crashes Gold Market; Bonds Are Next!
TheBullionDesk.com 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 TheBullionDesk.com.
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).
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