The Liberation Essays, No. 2 - A Must Read for all Shareholders of SLV and GLD

In response to fixing the obviously corrupt and broken global financial system and all of its products, we believe that the first step, even before the implementation of a new, sound and legitimate monetary system, is the establishment of a free market for gold and silver. As those of us that have been involved in PM markets for the past couple of decades can attest to, the circumstantial evidence of price behavior, as well as concrete evidence manifested by past US Federal Reserve memos obtained through FOIA requests, have proven that gold and silver markets have been highly manipulated with all the manipulation on the side of price suppression. It also seems likely that certain products developed by bankers to sell gold and silver, specifically the GLD and SLV ETFs, may mislead and misdirect the investment of billions of dollars into products that ultimately also may surreptitiously serve to suppress gold and silver prices.  The usual suspects are the bullion banks that have been employed by the Central Banks in the past to short gold and silver and keep prices down. Currently the US Department of Justice has been investigating JP Morgan’s alleged role in the suppression of silver prices.

To this end, we have scripted an open letter below to the US DOJ that we encourage all of you to cut and paste and email to the DOJ in the hopes of prompting another investigation that will help establish free markets for silver and gold, an event that corrupt Central Banks never want to see materialize. Should our suspicions be founded regarding the true nature of the GLD and SLV, the continued administration of these potential frauds has negative consequences a million-fold greater than Bernard Madoff’s Ponzi scheme. If our suspicions regarding the GLD and SLV prove to be correct, then bankers would be utilizing these ETFs to support the continuation of Keynesian economic policies and fiat currencies that are at the very root of sovereign debt crises that threaten some of the largest economies in Asia, Europe and the Americas as well as the livelihood of billions of their citizens. If thousands of concerned citizens send this letter to the DOJ,  we can either establish once and for all that:

(1) the GLD and SLV are not fraudulent investment vehicles that are actually used by JP Morgan and HSBC to suppress the price of silver and gold respectively; or

(2) they are fraudulent and should be shuttered before they are able to operate without impunity for nine years as did Madoff’s Ponzi scheme.

If enough of you email the below letter to, if the GLD and SLV are revealed to be fraudulent in the future and the DOJ fails to act upon thousands of requests for an investigation into the intended purpose of the GLD and SLV ETFs, then the US DOJ will have a public relations nightmare on their hands for having received thousands of inquiries into the questionable information contained within the security filings of the GLD and SLV and for having failed to protect the consumer.


US Department of Justice

950 Pennsylvania Avenue, NW

Washington DC 20530-0001


Dear Attorney General Eric Holder:


In response to your open investigation regarding the suppression of silver prices in the COMEX futures markets by JP Morgan, we believe that two PM ETFs, the SLV, of which JP Morgan serves as custodian, and the GLD, of which HSBC serves as custodian, firmly deserve a thorough investigation as well.  The SEC has proven itself incapable of investigating, identifying or even willing to prosecute fraud even when presented with ample damning evidence (reference Harry Markopolous and his failure to provoke the SEC to shut down Bernard Madoff’s Ponzi scheme for nine years).  Consequently, we believe it is incumbent upon the Department of Justice to take the initiative to restore the confidence of the American people in US financial markets as your office stands as the last bastion of hope in defending integrity in financial markets and security regulatory agencies have proven themselves to be woefully inadequate and incapable of this task. To this end, we request an immediate investigation into the legitimacy of the SLV and GLD exchange traded funds for the following reasons.

We believe that there are far too many loopholes contained in the prospectuses and legal filings of both the GLD and SLV that present the very strong possibility, and probable likelihood, that these funds engage in deceptive and fraudulent business practices. If our suspicions about these two funds are proven to be founded, we believe that the actions involved with the administration of the GLD and SLV exchange traded funds may mirror the fraudulent actions of Goldman Sachs in the mortgage backed securities markets, whereby Goldman Sachs packaged toxic MBS into collateralized debt obligations, represented them as solid investments to their clients even as they knew otherwise, and shorted them without their clients’ knowledge to turn profits. In other words, we believe that the GLD and the SLV may have been formed with the very intent of diverting investment funds away from real physical gold and physical silver to provide a vehicle to suppress the price of gold and silver in physical markets without the knowledge of those clients that choose to invest in the GLD and SLV.

Please allow us to address our concerns with the GLD exchange traded fund below, and place it on record that our concerns with the SLV are the exact same as our below stated concerns with the GLD.

The Custodian of the GLD is HSBC Bank USA, N.A., or HSBC. The Custodian is responsible for the safekeeping of the Trust’s gold bars transferred to it in connection with the creation of Baskets by Authorized Participants. The Custodian also facilitates the transfer of gold in and out of the Trust through gold accounts it maintains for Authorized Participants and the Trust. The Custodian is a market maker, clearer and approved weigher under the rules of the London Bullion Market Association, or LBMA. The Trustee is BNY Mellon Asset Servicing, a division of the Bank of New York Mellon.

There are numerous troubling descriptions in the GLD’s 10-K filing under the “Custody of the Trust’s Gold” section regarding the chain of custody that ensures that the GLD is backed 100% by fully allocated, London Good Delivery bars that have no third or fourth or fifth party claim. For example, the GLD 10-K filing states:

“The Custodian is authorized to appoint from time to time one or more subcustodians to hold the Trust’s gold until it can be transported to the Custodian’s London vault. The subcustodians that the Custodian currently uses are the Bank of England and LBMA market-making members that provide bullion vaulting and clearing services to third parties. The Custodian does not have written custody agreements with the subcustodians it selects. The Custodian’s selected subcustodians may appoint further subcustodians. These further subcustodians are not expected to have written custody agreements with the Custodian’s subcustodians that selected them.”

There are huge problems in the above custody conditions that could allow for massive fraud. Why are there no written agreements between the Custodian and the subcustodians that ensure that the physical gold the subcustodians hold on behalf of the GLD will be 100% accounted for and 100% allocated at all times? If a fund was entrusting the physical storage of a precious metal to a third party, why are no written custody agreements in place to also ensure that the subcustodians must ensure that the gold they hold consists of Good Delivery bars? If the Trust is to hold gold allocated specifically in its name (except for the allowance of no more than 430 ounces of unallocated gold as stated in its prospectus), how can they ensure that the gold its subcustodians hold is 100% allocated if no written contracts specify any qualifications for the gold they hold in behalf of the Trust? These are glaring omissions of standard business practices for a fund that at the end of March 2010, held more than $40 billion of physical gold. In the next two months alone, the GLD supposedly added nearly 25% more physical gold to their vaults as they claimed by June 1, 2010 that the dollar value of physical gold they held as of June 1 exceeded $50 billion in value. Does all this physical gold exist in allocated form in Good Delivery bars as HSBC Bank USA claims?

If we continue reading the 10-K “Custody of the Trust’s Gold”, glaring omissions of standard business procedures grow even more worrisome. This section continues:

“The lack of such written contracts could affect the recourse of the Trust and the Custodian against any subcustodian in the event a subcustodian does not use due care in the safekeeping of the Trust’s gold… However, the Custodian may not have the right to, and does not have the obligation to, seek recovery of the gold from any subcustodian appointed by a subcustodian.”

From the above passage, we must conclude that if the Custodian, HSBC Bank USA, requests the delivery of physical gold from a subcustodian and the gold is found not to exist, then the Custodian may have zero recourse and may not have a right to seek recovery of gold from said subcustodian. Furthermore, the above states that the Custodian, HSBC Bank USA, does not even have an obligation to seek recovery of that gold if it is found not to exist in physical form. This is a massive red flag to anyone that wants to ensure the legitimacy of the GLD ETF. The first and foremost responsibility of the Custodian should be to ensure that the physical gold purchased by the Trust actually exists in the manner and terms that are represented to investors in the GLD. Why does the GLD’s 10-K absolve the Custodian, HSBC Bank USA, of the responsibility of ensuring that the physical gold allegedly held by the Trust exists, that the gold held in behalf of the GLD Trust is 100% allocated, and that this gold is in the form of Good Delivery bars?

Granted, the above concerns are moot if one can prove that:

(1) all allocated gold held by the Trust is held in their vaults and not the vaults of subcustodians; and

(2) that neither subcustodians nor any third party maintain a simultaneous claim on any gold held in the vaults of the Trust.

As we will point out later in this letter, under the current business practices of the GLD, it is impossible to prove that either point (1) or (2) is true.

Of even greater concern is the following section of the description of the “Custody of the Trust’s Gold”:

“The Custodian and the Trustee do not require any direct or indirect subcustodians to be insured or bonded with respect to their custodial activities. The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate. The Trust will not be a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of the coverage. Therefore, Shareholders cannot be assured that the Custodian maintains adequate insurance or any insurance with respect to the gold held by the Custodian on behalf of the Trust.”

The above passage acknowledges that the subcustodian vaults that contain the GLD’s physical gold have zero obligation to insure the value of the gold in their vaults. If inspections of the subcustodian vaults, which the Trustee only allows a maximum of twice a year, yields zero physical gold, shareholders of the GLD would have zero recourse for their massive losses. Again, why is no insurance or bonding required for the physical storage of billions of dollars worth of gold (as of June 16, 2010) by subcustodians as it passes through the chain of custody to arrive in the GLD Trust vaults? The lack of insurance is truly mindboggling.

The above fact becomes even more odd considering that BullionVault, a private gold dealer, holds insurance with Lloyds of London for up to $600 million for each of its individual vault locations, an amount that currently exceeds the gold stored at each of its individual vault locations.  Cumulatively, BullionVault, as of June, 2010 stored $930 million of physical gold, all of which is more than adequately ensured. Conversely, the GLD held, as of March 31st, 2010, more than 43 times the amount of gold held at BullionVault, yet its 10-K states that the Custodian may not maintain “adequate insurance or any insurance” on more than $50 billion worth of gold. This, despite the fact that the Trust specifically acknowledges in the GLD prospectus that “The Trust’s gold may be subject to loss, damage, theft or restriction on access” and “The Trust may not have adequate sources of recovery if its gold is lost, damaged, stolen or destroyed and recovery may be limited, even in the event of fraud, to the market value of the gold at the time the fraud is discovered.” Furthermore, the GLD prospectus clearly states: “The Trust does not insure its gold. The Trust is not a beneficiary of any such insurance and does not have the ability to dictate the existence, nature or amount of coverage.”

As of June, 2010, the amount of gold held by the GLD makes the GLD the fifth largest holder of gold in the world, ahead of the gold reserves of entire nations including China, Japan, the Netherlands, Russia, India and even the reserves of the European Central Bank. If every one of these countries/entities finds it excessively risky not to ensure the gold they hold, why does the GLD find it acceptable to not insure its allegedly massive physical gold holdings? On BullionVault’s website, BullionVault states “your gold is protected by Via Mat’s extensive physical security measures and by externally underwritten insurance” and “in a vault, gold is so secure that it is extremely easy to insure and not expensive”. If gold stored in a secure vault is extremely easy to insure and inexepensive, why does the GLD refuse to insure 100% of its holdings? This again is a huge red flag that needs to be investigated.

At first glance, the 10-K “Custody of the Trust’s Gold” section and information in the GLD’s S-3 filing seem to disperse the above concerns:

“The Custodian is obliged under the Allocated Bullion Account Agreement to use commercially reasonable efforts to obtain delivery of gold from those subcustodians appointed by it. Under the customs and practices of the London bullion market, allocated gold is held by custodians and, on their behalf, by subcustodians under arrangements that permit each entity for which gold is being held. The Custodian provides the Trustee with statements on a monthly basis which contain sufficient information to identify each bar of gold held in the Trust Allocated Account and the custodian or subcustodian having possession of each bar.”

“As at March 31, 2010, the amount of gold owned by the Trust was 36,324,952 ounces with a market value of $40,520,483,790 (cost – $30,289,189,919), including gold receivable of 166,431 ounces with a market value of $185,653,480 based on the London PM fix on March 31, 2010. As at March 31, 2010, the Custodian held 36,158,483 ounces of allocated gold in the form of London Good Delivery gold bars in its vault and 38 ounces of unallocated gold, excluding gold receivables, with a market value of $40,334,830,509 (cost – $30,103,536,538). Subcustodians held nil ounces of gold in their vaults on behalf of the Trust and 166,431 ounces of gold was receivable by the Trust in connection with the creation of Baskets (which gold was received by the Custodian in the normal course of business).”

However, upon further inspection of the GLD’s business filings, the two above statements do not put any of our concerns to rest. The existence of physical gold within the subcustodian vaults can never be proven, because the 10-K states “In addition, the Trustee has no right to visit the premises of any subcustodian for the purposes of examining the Trust’s gold or any records maintained by the subcustodian, and no subcustodian is obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian.”  Consequently, even if the subcustodian provides records and lists of each individual gold bar it holds, these holdings can never by verified if significant amounts of the GLD’s gold is stored in subcustodian vaults. In addition, even if the Trust has indeed taken delivery of all physical gold from subcustodians for storage “in its vault” as it claims in its most recent S-3 filing, we still cannot strike any of our major three concerns about the GLD from potentially being subject to fraud. Because the GLD prospectus states “The ability of the Trustee to monitor the performance of the Custodian may be limited because under the Custody Agreements the Trustee may, only up to twice a year, visit the premises of the Custodian for the purpose of examining the Trust’s gold and certain related records maintained by the Custodian.”

Even if the Custodian can prove that all the gold it claims it has purchased on behalf of its customers for the GLD exists, since inspection of its gold is allowed a maximum of twice a year, such an arrangement allows the Custodian to possibly operate a Ponzi scheme to suppress the price of gold if it so desires, one in which it would transfer into its vaults physical gold held in subcustodian vaults that has already been purchased by third parties for the purposes of inspection and then transfer it back out after the inspections have been completed. Just the potential of such an arrangement leading to fraud should create a need for more specific and meticulous vetting of the physical gold held for the Trust.

We have broached enough serious concerns in this letter to bring the legitimacy of the GLD into question. Just because HSBC Bank USA claims it physically possesses Good Delivery bars in 100% allocated form on behalf of its Trust does not make this claim a fact.  Numerous procedural loopholes have been set up in the operation of the Trust that seemingly have no purpose but to prevent the determination and simple assessment that the Custodian holds gold in allocated form in Good Delivery bars. Bernard Madoff produced statements to his clients that illustrated he was engaging in trades for his clients despite the fact that he executed zero trades.  The business practices of the GLD leave the GLD open to such deception as well, and were all shareholders of the GLD to take physical delivery of gold held in the Trust, we are quite certain that knowledge of the contents of this letter would introduce serious doubt as to whether the GLD could make good on all physical delivery.

A further troubling aspect regarding the form of gold held in the GLD is exposed through the GLD’s procedure for redemption of its shares into physical delivery of gold. The GLD’s prospectus claims that only “Only Authorized Participants, and no shareholders, have the right to redeem shares for actual gold” in the form of a basket that consists of 100,000 shares. The authorized participants as of March 31, 2010 were BMO Capital Markets Corp., CIBC World Markets Corp., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., EWT, LLC, Goldman, Sachs & Co., Goldman Sachs Execution & Clearing L.P., HSBC Securities (USA) Inc., J.P. Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. Incorporated, Newedge USA LLC, RBC Capital Markets Corporation, Scotia Capital (USA) Inc. and UBS Securities LLC. A good number of the firms on this list, including Deutsche Bank, Citigroup, Goldman Sachs, JP Morgan, and Scotia Capital have been known to act as bullion agents in the past for the US Federal Reserve central bank. Of this list, five of the authorized participants, Deustche Bank, Goldman Sachs, HSBC, JP Morgan, and UBS, are market makers that establish the daily London AM and PM price fix for gold.

However, of greater concern is the following. The GLD’s 10-K dated March 31, 2010 states, “the Custodian held 36,158,483 ounces of allocated gold in the form of London Good Delivery gold bars and 38 ounces of unallocated gold, excluding gold receivables” yet the GLD’s prospectus states “Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss.” Given that all of the gold held by the Trust is in the form of allocated London Good Delivery gold bars except for gold receivables held in subcustodian vaults and only 38 ounces of the gold are unallocated, why should the Custodian of the gold, HSBC Bank USA, issue a disclaimer that the gold delivered to authorized participants may not be in the form of London Good Delivery bars? Furthermore, procedure for the creation of baskets of gold for share redemption deem that this gold must be drawn from unallocated accounts, which does not make sense if 100% of the Trust gold is to be allocated once it is in the possession of the Trust’s vault.

However, the lack of ability to confirm that any physical delivery of gold will be Good Delivery bars becomes even more suspicious if one reads the statement in the GLD 10-K’s filing that states, “Unless otherwise agreed by the Custodian in writing, the only gold the Custodian will accept in physical form for credit to the Trust Unallocated Account is gold the Trustee has transferred from the Trust Allocated Account.” Thus if any gold transferred to the Trust Unallocated Account comes from the Trust Allocated Account and all gold held in the Trust Allocated Account is London Good Delivery gold bars, why is HSBC Bank, USA, unable to confirm that gold delivered via the Trust Unallocated Account are also London Good Delivery gold bars?

Finally, the procedural inconsistencies throughout the filings of GLD open up the possibility that Authorized Participants, specifically the LBMA market makers, possibly use GLD shares to manipulate gold prices in the futures markets as well. The GLD 10-K states that

“Certain Authorized Participants are expected to have the facility to participate directly in the gold bullion market and the gold futures market.” In July, 2009, Mr. Adrian Douglas of GATA stated that something seemed to be amiss regarding movements of physical gold in and out of the New York COMEX markets: “When averaged over a month, the “flow” of metal inventory [in and out of COMEX vaults] should be comparable to the delivery notices issued. This is just basic accounting. But I have observed that reconciliation is almost impossible with the COMEX data. The only explanation I could think of is that settlement of contracts must be bypassing the warehouse. But how could this be possible, as I thought all contracts had to be delivered via a COMEX registered warehouse?” As a possible explanation, Mr. Douglas noted that Exchange Rule 104.36, which governs Exchange of Futures for Physicals (‘EFP’) transactions on the COMEX “refers to a ‘physical commodity’ as one of the required components of an EFP transaction but also indicates that the physical commodity need only be substantially the economic equivalent of the futures contract being exchanged.”

Exchange Rule 104.36 further states, “The purpose of this Notice is to confirm that the Exchange would accept gold-backed exchange-traded funds (‘ETF’) shares as the physical commodity component for an EFP transaction involving COMEX gold futures contracts, provided that all elements of a bona fide EFP pursuant to Exchange Rule 104.36 are satisfied.” 

The inherent problem in allowing paper GLD contracts to be delivered as the long transaction necessary to balance every short position in gold assumed on the COMEX is that the poor business practices established by the GLD leaves the existence of the physical gold held in the GLD’s Trust in question. We believe that we have established reasonable doubt that the Custodian of the GLD holds all gold it claims in fully allocated and in Good Delivery bar form. Consequently, the delivery of paper contracts that represent the presence of questionable gold should not be allowed to offset short positions taken against gold in the COMEX until this can be proven. Furthermore, when GLD paper contracts are delivered to cancel out short positions assumed in the COMEX futures market, is the gold that represents the GLD paper contracts removed from the Trust’s warehouses as good business practices would dictate?

In our estimation, the US DOJ should carry out a detailed investigation to ensure that the GLD and SLV have not been invented to assist in price suppression schemes against gold and silver.  Since the GLD prospectus states that the Custodian maintains a central London vault premise and the GLD 10-K states that all allocated gold is held there, the DOJ should arrange for periodic unannounced investigations of the London vault that does not allow for gold to be transferred into the Trust’s London vault if it is not already there. The DOJ should further not allow for the cover of “English law” to prevent its investigation, for if the existence of allocated Good Delivery bars that have no third party claim cannot be proved, then the GLD should be dissolved.

The GLD provides a bar list that lists each individual bar number, refiner’s name, bar gross weight, fine weight, and assay content.  The DOJ should assign an independent auditor that can check the Custodian’s London vault premises, unannounced, as often and as many times as it desires during the course of any year to confirm that the GLD holds London Good Delivery bars, allocated specifically to the Trust and to no third party, and in the amount specified by the GLD’s business filings.  If all the gold is allocated as the GLD claims, to only the Trust, then there should be no need to move gold in and out of the London vault premises except for redemption of shares or as “gold” transferred to COMEX warehouses to satisfy long contracts that request delivery. Thus, the amount of gold held within the Trust’s vault should always equal the amount of money that the ETF has collected from investors, sans the gold receivable amount and the normally insignificant amount of unallocated ounces. This is a simple task to prove.

Either the gold is in the Trust’s vaults or it is not, either it is in Good Delivery bar form or it is not, and either it is allocated specifically to the GLD Trust or it is not.

We believe the DOJ needs to establish the credibility of the GLD by investigating the points we raise in this memo and verifying that none of our concerns are founded. The same concerns that apply to the GLD stated in this memo also apply to the silver ETF, the SLV, the custodian of which is JP Morgan.  As the DOJ is already investigating JP Morgan for manipulation of the silver markets in the futures markets we believe it is essential for the DOJ to also vet the SLV for each of the problems noted in this memo as well.

Today in America, citizens have very little faith in the regulators to execute their job properly.  Industry regulators seem to be more concerned with hobnobbing with and catering to the greed of industry executives rather than ensuring that consumers are properly protected against fraud and criminal activity. The recent BP/Transocean rig disaster in the Gulf of Mexico is another example in which a chronological timeline of events that led to this disaster revealed regulators to be worthless in protecting the consumer, the State, and our nation from an entirely preventable disaster and the greed of corporations. Fines are not the answer.  Fines will not prevent a massive loss of incomes and wealth to workers affected by corporate negligence and willful deception. If industry executives are found guilty of criminal activity, extended jail time is the solution. And nothing short of a thorough investigation into the operation of the GLD and SLV to prove that none of the above concerns we stated are founded will restore America’s confidence in the financial industry.

Everything for everyone, nothing for us,