Physical Gold Is On The Move

On 16 December 2008 in Oil Majors Should Just Buy Real Gold I wrote, “The entire eligible COMEX stockpile represents an immaterial 0.36% of the current assets of the five oil majors.  The oil majors could drain the COMEX with a rounding error.  It would be 14% of what Exxon Mobil was spending per quarter buying back stock.  Why buy back stock when oil is so cheap compared to gold?  Why not just buy physical gold and truck it away?”  As the chart shows, Exxon and the other oil majors should have done that.  COMEX stockpiles have also precipitously declined.

London and Zurich have been the loci of gold trading for centuries.  The London gold vaults serve the needs of the London Bullion Market Association.  On 11 May 2009 The LBMA reported, “Gold ounces transferred between accounts held by bullion clearers fell 7.6 percent to a daily average of 20.5 million ounces in April from a month earlier. … Ounces transferred in silver rose 2.4 percent to a daily average of 101.1 million.”  This amounts to approximately $19B of physical gold and $1.4B of physical silver which exchange everyday.

THE EXCHANGE TRADED FUNDS

Many people think the GLD ETF claims to physically possess more than 32M ounces of gold.  On 29 March 2009 Jake Towne wrote, “The inventory of SLV has leapt from 218 million ounces since January 1st, and reached 267 million ounces on March 26. This exceeds the limit of 264 Moz that the trust had set for the custodian, JP MorganChase. In the new prospectus (pg 8/44), the text reads:

The custodian has no obligation to accept any additional delivery on behalf of the trust if, after giving effect to such delivery, the total amount of the trust’s silver held by the custodian exceeds 264,550,265 troy ounces. If this limit is exceeded, it is anticipated that the trustee, with the consent of the sponsor, will retain an additional custodian… As a result, the new agreement may differ from the current one with JPMorgan Chase Bank N.A., London branch, with respect to issues like duration, fees, maximum amount of silver that the additional custodian will hold on behalf of the trust, scope of the additional custodian’s liability and the additional custodian’s standard of care.

I have not been able to find out who SLV has named as the new custodian.”

I have written extensively about the problem with the GLD ETF prospectus regarding the actual possession of gold.

CENTRAL BANK GOLD PRICE SUPPRESSION SCHEME

Dr. Greenspan testified before Congress in 1998, “Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”

Ad hominem attacks, those which appeal to emotions instead of reason or logic, are for the intellectually slothful mental midgets.  Ideas can only be overcome by other ideas.  When confronted by superior ideas it is common to lash out like a frightened animal, appeal to emotion and refuse to confront the fitter ideas.  After all, when one will lose the fight the only option is to flight.

GFMS claims to be “the world’s foremost precious metals consultancy, specialising in research into the global gold, silver, platinum and palladium markets. … GFMS can claim to be the only genuinely independent researchers of the gold market, as we do not rely solely on financial support from one sector of the industry. You can trust us to give it to you straight.”

When questioned about debating the Gold Anti-Trust Action Committee about the central bank gold price suppression scheme Philip Klapwijk, Executive Chairman of GFMS, “replied with a very definite “NO!”  He quoted Margaret Thatcher on the IRA in that he would not wish to give the GATA views the publicity that such a debate might generate.”

The truth will cleave its own way and GATA’s views are spreading as billionaire Adam Fleming recently hosted GATA on 7 May 2009 in London.  ”Wednesday was a great first day of work for GATA’s delegation to London — GATA Chairman Bill Murphy; Sprott Asset Management’s chief investment strategist, John Embry; John’s wife, Nancy; and your secretary/treasurer.

We had interviews with the Sunday Times and Dow Jones Newswires and then in the evening made an hour-long presentation to a group of about 80 financial and mining people at the office of Fleming Family & Partners.”

Mr. Robert Landis, a graduate of Princeton University, Harvard Law School and member of the New York Bar, has asserted that “Any rational person who continues to dispute the existence of the rig [central bank gold price suppression scheme] after exposure to the evidence is either in denial or is complicit.”

POSSIBLE GFMS INVOLVEMENT IN THE GOLD PRICE SUPPRESSION SCHEME

As the ‘world’s foremost precious metals consultancy’ surely Mr. Klapwijk cannot be ignorant of GATA’s assertions.  He implied familiarity by saying he did ‘not wish to give the GATA views the publicity’.

If one has superior ideas and arguments then why be so afraid of debating a hoard of Harvard trained attorneys?  He should show GFMS’s independence and preeminence as the foremost precious metals research firm by rebutting GATA’s claims in a formal debate.  Surely that would be good for GFMS’s business.  Or is Mr. Klapwijk as Executive Chairman of GFMS complicit in the central bank gold price suppression scheme?

IMF ASSERTION OF COOKED CENTRAL BANK BOOKS

In a recent article by Rob Kirby of Kirby Analytics titled Forensic Examination of the Gold Carry Trade he found yet another very interesting passage from an IMF paper titled Treatment Of Gold Swaps And Gold Deposits (Loans), on page 4: “7. The current statistical treatment of gold swaps should be consistent with that of repos.  The guidance of paragraph 85 (iii) of the Guidelines, which is applied to gold swaps by paragraph 101, results in overstating reserve assets because both the funds received from the gold swap and the gold are included in reserve assets. While the gold is swapped, it cannot be the case that both the claims and the gold are simultaneously liquid and readily available to the monetary authority.”

In other words, as GATA has long asserted the central banks “carry gold in the vault and gold out on loan as one line item; as a result report cash and accounts receivable as one in the same thing.”  Additionally, central banks receive currency when they loan the physical gold generating the accounts receivable.  Deceptively they carry both the currency and the accounts receivable on their balance sheet as assets.

Anyone reading the report should take seriously the disclaimer on page 1, “The views expressed in this paper are those of the author(s) only, and the presence of it, or of links to it, on the IMF website does not imply that the IMF, its Executive Board, or its management endorses or shares the views expressed in the papers.”  I doubt the Executive Board wants to endorse a report that blatantly shows how the central banks are double counting their assets.

THE ARABS ARE TRUCKING OFF THE GOLD

On 13 May 2009 Emirates Business 247 reported that the Dubai Multi Commodities Centre has finished a state of the art vault which will become the new home for the Dubai Gold Securities’ ETF.  Additionally, ”It’s a natural home for the central banks in the region to store their gold in Dubai rather than in London where they have typically held their gold. Particularly when DMCC has a state-of-the-art facility to store such precious metals,” said Jeffrey Rhodes the CEO of INTL Commodities DMCC, a Dubai-based gold dealer.”

As revealed by China’s recent announcement of an increase in gold reserves from 600 to 1,054 tons it appears that the Western central banks are overstating their physical gold reserves while the Eastern central banks are understating them.  Now the Middle East is demanding physical possession of their gold.  It will be interesting to see whether a failure to deliver occurs at a major exchange such as the COMEX or LBMA.

CONCLUSION

At all times and in all circumstances gold and silver are money.  Even though the great credit contraction has begun there is a microscopically small amount of physical gold and silver bullion compared to the financial assets which have not yet evaporated.  The GLD and SLV ETFs purportedly hold large amounts of physical bullion but their respective prospectus are riddled with risk.  For decades Western central banks have bled gold through minor wounds.

But now Eastern and Middle Eastern central banks, ETFs and gold dealers are reducing their risk by taking physical delivery of bullion.  In effect, they are digging into and ripping wide-open the wound and causing gold to spurt out like a failing dam.  Gold is cash and to be bought when one does not know what else to buy.  Like the Eastern and Middle Eastern central banks, individuals should only buy gold or silver bullion for physical delivery or use a trusted third party vaulting service that has the physical bullion in possession along with appropriate corporate governance like GoldMoney or your gold might learn how to vanish.

Disclosures:  Long physical gold and silver with no position in XOM, GLD or SLV.

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