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Who is going to buy gold?
This is the first in a series of what some may consider as “gold bashing” articles. I am not short gold in any shape or form. I have no axe to grind against gold bugs. I am simply presenting the other side of the argument in response to what I deem to be dishonest, gold-pimping commercials (e.g., “If gold prices went up to $5,000 this pile of gold would be worth $300,000”) that we are subjected to all day long on TV. I may be wrong, but I am honest.
Here is a trivia question for you: what country is the seventh largest holder of gold, ahead of China, Japan, and Switzerland? Well, it was a trick question: the seventh largest holder of gold is not a country, it is an exchange-traded fund, GLD. Yes, a fund that is not even five years old is the seventh largest holder of physical gold in the whole world, even ahead of mighty China.
When investors buy GLD, GLD in turn has to go out and buy gold, driving up the price. This raises a little question: who will be buying this gold from GLD when investors decide to sell it? Gold is one of those weird assets where nobody knows what it is really worth. You cannot run discounted cash-flow analysis to value it – it has no cash flows. It is an asset where perception and reality are deeply intertwined.
Investors buying the gold ETF (GLD) are influencing the price of gold, which is fair for the most part, as otherwise they’d be buying the real thing. The ease of buying GLD creates a higher, artificial demand – but GLD is still fair game.
The violent selloff in GLD will be caused by factors that are hard to predict today (e.g., hedge-fund liquidations) but that will drive the price of gold down dramatically unless a real buyer steps in (like another government sick of owning the US debt, for instance), and the gold price could get cut in half overnight. Suddenly, perception of not being a store of value will create the reality of gold not being a store of value. The gold game will be over.
Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of "Active Value Investing: Making Money in Range-Bound Markets" (Wiley 2007). To receive Vitaliy's future articles by email, click here.
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First Question.......
What makes you think GLD actually owns physical gold? Have you seen their holdings? Have they been audited?
Well, you could visit /www.spdrgoldshares.com/sites/us/gold_bar_list/, and actually see the list. You could also go to GLD's home page, and download their 10-Q's.
Alternately, you could fly to London and ask HSBC if you could see their vault. Good luck with that.
I have never seen so many ignorant comments about GLD that are so easily checked by any one with a few moments.
Here you go:
http://gata.org/node/7586
Yeah, so we'll just all turn up at the same time and ask nicely to be allowed to see the latest audited list of good delivery bars. Or maybe we should just rely on their 10Q. Which we can get off their home page of course.
Presumably you've seen this?
http://www.zerohedge.com/article/project-mayhem-research-multiple-anomal...
Wait, that was a dumb question. You stupid twat.
Good question.
http://www.rapidtrends.com/2009/02/13/owning-gld-can-be-hazardous-to-you...
And yes, GLD Shares (A Derivative) are deliverable as settlement of a Gold futures contract.
Sound familiar, Derivatives Squared?
If gold is for systemic crisis as PM presented,then GLD is not for it. The purpose to own physical gold is entire different from to own GLD. GLD is an excellent investment media for institutions, which does not allow to own physical gold. Of course GLD could drag the gold price down. Central banks can be careless about it, and hold their gold. They will be more than happy to purchase them.
Some wisdom from 1974. Rock on!!!!!
http://www.youtube.com/watch?v=xVJ6JR4OeiU
Author is correct - if gold was a commodity. The author is basically describing the $137-$40 oil event last year. And that was a free-market move, right? Ya right.
Besides, that shit already happened last year in March and POG went to $750. May happen again, so what? Tells you that gold is not for investors and speculators but for people that are exactly the opposite: they dont want to earn high yields associated with the unknown risks of Wall Street.
Shares in a gold ETF are not gold. Not even close. You buy GLD, you buy a remote derivative of gold backed by hot air. This is documented. Good luck getting your GLD shares delivered as metal. GLD shares are not the asset that sits on the balance sheets of a central bank. And that is what matters since where is gold, there is capital base and all other financial (infra)structure grows around it (and if there is also a Rule of Law).
For example, you cant do international trade unless you have a collateral for transactions (or a lot of guns). OTC derivatives are not collateral, they are only "certificates of popularity" that the all-marketing firms of Wall Street issue.
Making the investment-active community to treat gold as a commodity is the best trick political economists have played in recent times. All the while they have been silently using the nation's gold as a base to expand money in a fractional-reserve type of play or guarantee large trade deals.
Answer me this: if gold metal was a commodity, what is it doing on the balance sheets of a central bank?
You buy GLD, you buy a remote derivative of gold backed by hot air. This is documented.
Um, where is this documented? The SPDR gold prospectus (http://www.spdrgoldshares.com/sites/us/prospectus/) specifically states that they will not buy futures contracts. Please provide some backup that supports your seemingly mistaken view.
Yeah, and Madoff told everyone their money was safe. This is called COUNTERPARTY RISK. The point in owning gold is to avoid this risk. But buying GLD you are purchasing a derivative -- by definition.
Remember risk can come from unexpected places. What happens if the government decides to nationalize the holdings of GLD during an emergency? Do you think you will have any recourse if this is done by executive order or an act of Congress?
You seem intent on proving GLD is safe for whatever reason. That's fine... how about this. We'll wait until the system crashes (sometime between now and 3 years from now) , and we'll see what is worth more -- hallucinated computer-pixels in GLD , or actual physical coins in your hand.
Do you think you will have any recourse if this is done by executive order or an act of Congress?
Did you think that maybe this is why the physical gold is held in London, and not in, say, NYC? Maybe it's because Britain, unlike the US, did not confiscate gold during the Depression?
And, while I won't dispute the possibility of your crash thesis, if it comes to that, I think guns, ammo, food, and water will be much more valuable than gold.
I will concede the point about gold in NYC vs London. This didn't occur to me... But if the US decides to install capital controls, getting access to precious metals stored within the system will be difficult if not impossible.
I agree on the point about storable food, guns, etc. Hopefully it never comes to that.
Several posters make it a point to note that, if a very serious economic disaster unfolds, you will become a target for some very nasty visits if you are "known to own gold". Some of these very same posters then urge us to instead stockpile food, guns, ammo etc. Well, what makes them think that they themselves won't be targeted by the same thugs for the very same kind of visits if they are known to hold food?
In order to pull this off, you must discuss it with your neighbors and get everyone on board. Otherwise, what do you think would happen when everyone else's kids start getting skinny and yours don't? I can tell you: you won't be able to let your kids out of the house.
No man is a island. You cannot go it alone; it's not possible.
Only the perfectly designed Ego blinds us to the fact that we are social beings and when times get tough, the Ego blows away and the Truth comes to the fore. The games do disappear and the posers crawl back into their holes. Take back your neighborhoods and get back to reality. You'll never escape without first getting over Yourself, or you can wait for your own personal white light experience. But then it's too late to realize that in the waiting, was denial.
Exactly
("The violent selloff in GLD will be caused by factors that are hard to predict today")
Maybe dollar will lose reserve status and gold will be valued as a commie plot?
Credit is money...Save us jebus that we may understand.
Everyone that maxed out there credit card or bought a car or bought a house that hasn't lost there job is still making payments on those loans. And the people that sold those items have that money so it is now circulating even if only in digital form.
Of those payments that are being made the lender gets to keep and the interest and the rest of the money that paid back on those loans actually gets destroyed or written off of the books...
With banks not willing to lend and people not will to borrow and everyone else paying off debt (IE destroying money) the amount in circulation is clearly deflating. (Job losses are the clearest indicator of that) The dollar is infact being held low as it should have broken to new highs on all of this currency/debt destruction. The FED has everyone fooled again with the minimal money printing (as compared to debt destruction) they are doing to get everyone to think that the dollar is being debased.
Gold is poised to collapse with the rest of the market. Once it does then you buy it right before the currency crisis hits as the US will not have enough funds to pay its debts. (Thats when the story gets interesting)
Gold is an asset..not a commodity and we are currently seeing asset deflation and commodity inflation. It was shocking to hear this from a fox news reporter but he hit the nail on the head with this comment.
"You sell the things you own to buy the things you need"
You sell gold to buy food/oil in a deflating economy. Gold loses value under these circumstances. at least while the dollar is a viable means of exchange.
I know a lot of nervous sovereigns and big money boys who would love not just to short $, but to unload them from all the printing, default, dilution, machination risk.
Remember in Depression 1.0 most of Europe's sovereigns defaulted. When that default occured what happened to the price of bonds? What happened to underlying currency?
AND what happened to AU?
Gold is not impervious to tremendous manipulation, but it will not be worthless like fiat and IOUs.
Depressions are mistakes. They are supposed to be normal fleecing activity and consolodation of wealth that somehow the general public becomes aware of it enough that they enforce a longer than expected or deeper than expected freeze up. We are probably working at least a 20 or 30 percent over reaction. In other words we are responding much more forcefully than the great depression. It's like being in a abusive relationship theres times when the general public shrinks from the conflict to go along theres times when fights and pushing back occur but it's all very dangerous as it could go to the point where the abused just loses it and kills the abuser. I think everyone pretty much knows this is going to end up like the movie slingblade.
If I TRIED to write a more IGNORANT article about Gold, I could not have succeeded. BTW, I don't want to engage in a personal attack, but considering you are a CFA, it makes sense. To begin your enlightenment process, here is something for you to consider (courtesy FOFOA):
"All cash is a short position on Gold."
If and when you understand this statement, you will have achieved financial nirvana.
+100
If I TRIED to write a more IGNORANT article about Gold, I could not have succeeded.
Seconded. The problem lies in the author's paradigm. The CFA-based paradigm is based on exactly what he wrote: "You cannot run discounted cash-flow analysis to value it – it has no cash flows." Mr. CFA has to then conclude that no cash flows = no value. That's it; case closed - if they can't discount some CF. This group simply cannot value precious metals or commodities (hint, they almost always think they are a bubble). Combine "commodities" and ETF(N)s, and you have violent opposition from them. There are very few CFAs that can escape their textbooks. Hence, I really value the ones who write opinions/research that can.
There are good arguments against a further rise in price of gold. Sadly, this contribution is in a different world.
+10
GG, thanks very much for that insight.
Actually, the author of the article is not saying anything that real gold investors (of which I am one since '05 and doing very well TYVM) and speculators don't already know -- i.e., gold price is volatile....also silver.
We all either have to be either nimble, or in it for the long term.......a little of both brings even greater rewards.
Also, the argument proposed in the article, as someone above suggested, ignores the value that gold has for most of the rest of the world. We in US have been brainwashed by the finance industry never even mentioning PMs as an investment, unless asked specifically. Then the "standard advice" is offered -- prudent allocation no more than 5%.
The venerable Harry Schultz, in one of his newsletters last year, recommended holding AT LEAST 30% of portfolio in gold and gold stocks. I took his advice (and went even further), and have been well rewarded, even after suffering last Fall.
I'm glad I held and was not stampeded out. Some of the smaller gold stocks are up 250%. I have taken some profits, but expect more.
I also have physical gold and silver.
Only 250%?
+1
WOW !
I have seldom seen two more clever comments anywhere.....witty repartee, ah jes luv it.................
idiots
Sector performance is all time frame specific and subject to opportunity cost.
Who is going to sell Gold if Shorts are forced to cover?
There seems to be a shift toward holding the physical ourside of NY, London.
Is a new Paradigm forming?
Who will win?
Leveraged derivative Play? Not for me.
"When investors buy GLD, GLD in turn has to go out and buy gold, driving up the price."
Really? Is that how a commodity ETF works? You might want to hit the books a little before you write your second article in this series.
I just read the SPDR GLD prospectus. It states specifically that it will only use money received to pay expenses and buy gold bars. It also specifically states that it will not purchase commodity future contracts.
Other ETF's may well purchase contracts, but not GLD.
You did not just read the SPDR GLD prospectus, or you are a very bad reader. GLD pays expenses by selling gold. When an "investor" buys GLD they they are buying it from another "investor", not from the trust. No money is received by the trust when a retail buyer purchases a GLD unit on the open market. GLD's gold is held by subcontractors who are cannot be audited (these are GLD's own terms). Recently, COMEX has begun accepting GLD certificates in exchange for real gold for settlement. This is bizarre since COMEX delivery bars are supposed to be traceable and GLD gold in not-allocated (ie not traceable, just held in an unaudited community pool).
GLD is a sucker's game. Stay away. If you want to speculate on gold buy the real stuff or at least look at CEF or something whose prospectus is not dripping with risky legal caveats.
You did not just read the SPDR GLD prospectus, or you are a very bad reader
I'd suggest that the person with the reading skills issue is you. If you read the latest 10-Q on their site, they state ZERO gold is held by any sub-contractors; all of it is held at HSBC in London. The prospectus quite clearly states that GLD will issue "baskets" of 100,000 shares, which is about $10 million worth of gold, at a time. Contrary to your assertion, when ever GLD purchases a new basket, this takes physical gold off the market - it's not just a transaction between third parties, like stock trading is.
Page 8 of the August 2009 10-Q shows quite clearly that GLD has purchased 5 million ounces in the last year. If you are unable to read and comprehend that, it's pretty clear to me why you post under "anonymous" - you're too ashamed to admit your own illiteracy.
I'm really sick of people posting opinion here without citing any sources other than their own wild speculation to back them up. If you believe GLD just invests in paper, PROVE IT. And if you think SPDR is engaged in massive fraud (i.e. making up their list of bars, posting fraudelent pictures on their web site, etc.) then why in the name of God would you have a single dime of your money on Wall Street.
You do understand that this is unallocated right?
I personally wouldn't doubt that the gold held by GLD is just double counted holdings of central banks or completely falsified. The shares are created by "somebody" dropping gold off at the trust in a basket of 50,000 oz then the shares are sold into the market and physical gold is then sold to cover the trusts expenses. Who the hell would do that unless they knew they would be the able to get their gold deposit back or that it was a completly fake deposit to begin with?
Who is first in line to buy the gold from the trust to cover the expenses? Is physical gold truly deposited at a the trust or is a certificate of gold ownership enough. How easy would it be to create a fake list of bars and present that as proof of gold on hand? Pretty damn easy I would bet. Why anyone would trust this "investment" as anything more than a raffle ticket is beyond me. The whole thing reeks of scamola.
wow good info. please continue to post here.
I think the questions are more along the lines of
1) why is shorting of GLD permitted? is there any naked shorting? etc
2) are GLD shares being used as gold delivery settlement in any futures systems or OTC systems?
No kidding. This guy is a CFA and doesn't even know how the gold ETF shares are created from baskets of the commodity. It's no wonder Wall Street keeps thinking up incredibly crazy financial concoctions: guys like this moron market them to idiots that haven't a clue.
I'm glad to see an other panic sell off, just to increase my phisical holding. I used this approach in the last 10 years and is paying off. Gold is a temporary store of value for the next 8 to 10 years and than...we will see which industries will have attractive PE ratios.
In 8-10 years elementary students will have graduated with a higher level of literacy than you and earn salaries at some of the corporations you might still not buy shares in. Sell some of your gold and buy a dictionary please.
Jerry Pournelle couldn't spell (his own admission) but produced many well written, highly popular, thought-provoking SF novels. Take a hike.
I don't have a tv but if there are gold commercials on all the time this is not a good sign haha
But I still disagree generally... I think hedge fund liquidation might push gold back down to 800-850 if there is another round of deleveraging but I think gold will recover quickly from any selloff. Buyers include the Chinese and Russian governments, as well as the Mideast Petro States like UAE. They are silently purchasing gold , this is well known although it does not show up in official statistics.
"They are silently purchasing gold, this is well known...."
Trying to get a grip on that sentence. Are they using hand signals or something? If that is a goldbug's best argument, I'm selling right here.
This link is for you and 61360 above you. AEP actually spoke to a well informed Chinese fellow who explains it in simple enough terms for the both of you. Ignore it, but don't discount it:
http://tinyurl.com/n3nvrs
"They are silently purchasing gold, this is well known...."
Something is wrong with that sentence. Unless you mean the Arabs and Chinese are using hand signals to purchase, which might explain the sentence, I'm selling, because an argument like that smells of top tick.
You can add in satellite radio to the gold advertising frenzy...every commercial on Bloomberg of CNBS is for either gold or some guy named Chet that will make you rich with internet strategies. Oh, and some couple that will get you a small business loan. I'm back in Toronto now and the gold TV ad guy here is hysterical--like locally TV produced commercials in the 70's. He even sings. As for where gold goes, great question. Bullishness is around 88% on the DSI. Silver is screaming in that department too. Doesn't mean they won't go higher short term.
There have been several exposes on these commercials.
They show that people are willing to accept 25% of spot as payment and, if they complain, they may get as much as 50%.
This is somewhat of the fundamental flaw in gold:
It's worth is based on intelligence or the lack thereof.
You can buy it for $650 and watch it run up to $1,200 but if no one will buy it from you for more than $900 what have you gained? Be sure to pay your taxes before you answer and also consider that as a hedge to inflation, inflation itself will eat up a lot of the benefit. In a collapse, a gold bar may pay your rent or buy a chicken but what will you accept as change? You no doubt will be better off than those without, but that is called risk cause once they know you have gold, you better have bullets to back it up.
Put flowers in your gun bunkie. They've got swat teams well-honed in global urban warfare theater dress rehersals for just such solutions.
The super bowl ads last year were a bunch of we buy gold commercials. LOL We buy gold commercials account for probably some 1/4 of the advertising everywhere.