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Jeff Nielson is the writer/editor of Bullion Bulls Canada. He came to the precious metals sector as an investor in the middle of last decade, and quickly decided this was where he wanted to focus his career. Jeff's background includes four years of Economics at the University of British Columbia, before he went on to earn his law degree from that same institution.

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‘D-Day’ Near For GLD

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Originally appeared at BullionBullsCanada.com.

The SPDR Gold Trust, more commonly known by its NYSE ticker symbol “GLD”, represents a triumph of “bankster engineering” in the gold market. While it is supposedly a convenient way for small investors to hold “gold”, what it is actually is an extremely convenient tool for the banksters to dilute the investor dollars flowing into the bullion market, and thus delay the rise in the price of gold.

It can be thought of as the “twin” of the iShares Silver Trust (or “SLV”). Because of the much more complex nature of the gold market versus the silver market, it is not as easy to draw inferences on the true purpose of this banker trading vehicle in the gold market based only on the trading taking place in that market. However, unquestionably it shares much in common with its silver twin.

As with SLV, the “custodian” for all the gold claimed to be held in this trust is the largest short-seller of gold in the world, UK banking behemoth, HSBC. Thus as with SLV, on its very surface GLD represents a massive conflict of interest. Any small gains for GLD unit-holders translate into enormous losses for the custodian, meaning that HSBC has a huge financial interest in limiting the profits of unit-holders as much as possible.

Further evidence that GLD was a creation for the benefit of bankers (and specifically HSBC) rather than shareholders can be obtained by any close scrutiny of the prospectus. Back in July 2010, I engaged in such an analysis, which I titled The Seven Sins of GLD. Regular readers will recall that I made several startling discoveries upon such scrutiny.

To begin with, there is no absolute requirement for the fund to invest all (or any) of the proceeds from the sale of units into the purchase of gold. The official “investment objective” of the fund is merely to “reflect the performance of the price of gold bullion” [emphasis mine]. In other words, rather than being structured as a genuine “gold trust” it is actually a self-described index fund – required to only track the price of gold, rather than being required to fully invest in bullion.

Indeed, the strongest statement which the fund Sponsor was prepared to make in terms of a “warranty” to unit-holders was that it “believes that for many investors the shares represent a cost-effective investment in gold”. However, the prospectus expressly defines that warranty as a “forward-looking statement”. It then later adds that with any/every forward-looking statement that “They are only predictions. Actual events or results may differ materially.”

What this boils-down to is that the Sponsor offers unit-holders nothing more than its “belief” that the fund will maintain its holdings in gold bullion, while warning investors that they cannot rely upon that belief. The glaring lack of any firm guarantee for unit-holders becomes increasingly significant when we examine other clauses within the prospectus. To the credit of the Sponsor and custodian, they do warn investors how little protection or guarantees they have in their investment in the section on “Risk Factors”.

Here the Sponsor does make one, firm guarantee: that the fund will continue to become more and more diluted over time. Specifically, while the original “intention” of the fund was for each unit to represent 1/10th ounce of gold, the Sponsor guarantees to investors that the gap between that original 1/10th ounce of gold and what unit-holders actually own will continue to increase over time.

Immediately we see one enormous difference between units of GLD and real bullion: real gold does not “evaporate” over time. Of course that difference is rather trivial compared to a much more glaring difference: the “counterparty risk” to which GLD unit-holders expose themselves.

Hold an ounce of gold in a safety deposit box, home safe, or buried in some secret “hiding place”, and no matter what our lemming-leaders do to the global economy, that one ounce of gold will continue to be one ounce of gold. In comparison, GLD unit-holders have maximum counterparty risk.

Specifically, not only do the Sponsor and Custodian claim complete immunity from any losses caused to unit-holders by “acts of God”, “war”, or “terrorism”, but they also seek to indemnify themselves from negligence, fraud, and willful default. Simply, under no circumstances could the (supposed) custodian for the unit-holders ever be required to deliver the gold it claims to be holding for those unit-holders “in trust”. Even if HSBC’s vault was over-flowing with gold it could simply choose not to deliver it to unit-holders, and all the unit-holders would ever be able to recover is their paper.

The prospectus further warns that the gold held in trust (inside HSBC’s secure vault) could be “lost, stolen, or damaged”. On top of that, the prospectus adds that the Sponsor can block “redemptions” (indefinitely) any time it decrees there to be an “emergency”. Quite obviously, the gold held by the Custodian “belongs” in every meaningful sense to the Sponsor and Custodian – not the unit-holders.

Indeed, to refer to this structure as a “Trust” is simply perverse. The one assurance which unit-holders could rely upon: that the rate of dilution of the fund would be capped at a fixed maximum is about to expire. “D-Day” (i.e. Dilution Day) has finally arrived for GLD. Lest investors think this merely some administrative triviality, the fund’s creators deliberately chose to be extremely melodramatic in this respect.

On the 11th day, of the 11th month, of the 11th year (November 11, 2011) the self-imposed cap on the rate of dilution for this fund expires. From this point onward, the fund will be diluted by any/all “expenses” incurred while administering the fund. This becomes especially important at this point in time, given one of the specific risks of dilution which the fund warns of in its prospectus:

The Trust may be required to terminate and liquidate at a time which is disadvantageous to Shareholders.”

With respect to this, the prospectus warns that because the fund is not “actively managed”, it will sell off its gold to pay expenses “as necessary”, and without the slightest regard to the current price of gold. Putting this together, the prospectus warns that dilution will increase over time, warns that its cap on expenses is about to expire, and further warns that when it pays for those “expenses” that it might happen to sell its gold at the worst possible time.

Who is incurring most of these expenses? HSBC. To whom will the sponsor be selling their gold in order to pay expenses? Given that the gold is sitting in HSBC’s vault, obviously the gold will be “sold” to HSBC, since otherwise there would be significant additional transaction/delivery costs.

If HSBC should (by some lucky “coincidence”) always forward its “expenses” to the Sponsor at a time of “sudden dips” in the price of gold, it has the potential for a substantial arbitrage windfall off of GLD unit-holders. Given the inherent conflict of interest upon which this fund was founded, this is obviously a substantial risk which no prudent unit-holder can afford to overlook. Should HSBC’s costs (i.e. what it chooses to pay itself) for holding this gold in their vault “unexpectedly” surge higher, and should the Sponsor of the fund be “unlucky” enough to happen to always sell its gold when the price “unexpectedly” drops, there is no theoretical limit on the rate of dilution of this fund after November 11, 2011.

Worse, as I alerted readers back in mid-September, it appears that volatility is the new bankster weapon to try to frighten as many investors as possible away from the precious metals sector. This further magnifies the potential losses for GLD unit-holders should the Sponsor repeatedly be “unlucky” in selling its gold (to HSBC) at the worst, possible times.

Strip away the flowery “beliefs” of the fund’s Sponsor,  and GLD has never warranted itself to be anything more than an index fund: a vehicle for trading in paper gold. It offers the absolute minimum to investors in the way of security, while exposing them to numerous counterparty risks.

In roughly two weeks time, unit-holders can add a new risk to their list of worries: the potential for virtually unlimited dilution of any gold actually being held on behalf of those shareholders. When we couple that with the fact that the more that unit-holders lose the more HSBC wins, then the combination of a blatant conflict of interest and the potential for unlimited “dilution” (in HSBC’s favor) represents an intolerable level of risk for any prudent investor.

The mainstream media loves to discourage the holding of “physical” bullion by pointing out that gold (and silver) “costs money” to hold. However, the one-time expense of a home safe, or the monthly fee for a safety-deposit box are trivial amounts, in return for completely eliminating both the massive counterparty risk and the enormous potential for dilution to which all GLD-holders are subjecting themselves. Beyond November 11th, this appears to be a lesson which those unit-holders are about to learn “the hard way”.

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