FOFOA,

There would be many within the Mint who would be amused at you categorising me as a “mainstream” view. I understand you are using my explanations as representative of the mainstream view but I would like readers to be clear that . . . → Read More: Gold Lenders of Last Resort]]> Another post by FOFOA that will get you thinking. My response below.

FOFOA,

There would be many within the Mint who would be amused at you categorising me as a “mainstream” view. I understand you are using my explanations as representative of the mainstream view but I would like readers to be clear that my personal view is different. To clarify this, some comments on your piece.

While I have no direct evidence of the bullion bank’s (BB) activities, I am not as sure as others that the BBs are massively financially short gold (this is not to say they don’t run short term speculative positions). My reasoning for this is that gains and losses on such positions impact their reported profit and loss. If they were as massive short for as long as some claim, their losses would have been visible.

I would also suggest readers ask why a BB would take on hundreds and hundreds of tonnes of short gold positions over time in some attempt to suppress the gold price. You only do this if you have a philosophical hatred of gold. I understand that gold ownership is a political action, a rejection of fiat currency and banking, but would (at this time) a bank with a BB division really be threatened by the pathetic fraction of a percent of those investors who hold gold? Threatened to the extent that they would of their own accord take on a massive short position?

Now the above does not mean I think everything is OK. On my fractional fubar post you mentioned, I commented “ It troubles me as well. The Mint has been under no illusions about London unallocated as the legals say we are an unsecured creditor and the bullion banks would never make any statement one way or another about what they did with it. We have operated accordingly.”

Bankers make money by intermediating – buying from one, selling to another, borrowing from one, lending to another – and taking their cut along the way. I would suggest readers consider the theory that BBs would be willing to intermediate for someone else with that philosophical hatred of gold and take their riskless cut along the way. Why risk your own money when someone else is willing to do so, with the bonus that their activity protects your banking “franchise”?

This then leads on to your statement that “there is no clearly defined lender of last resort to cover the risks”. Is this really the case? You mention two risks the BBs have.

1. Default – Borrowing gold doesn’t solve this problem, as the act of borrowing gives you an gold asset but also a gold liability. The only way to solve this problem is to buy the gold, which results in a loss because you have to give up dollars to acquire the gold asset.

2. Liquidity – Buying gold doesn’t solve this problem as while it gives you gold to give to your creditor but also gives you price exposure as you have technically bought your gold asset which is due in the future. The solution is to borrow gold directly, repaying it when your gold asset comes due. Alternative, you can borrow synthetically by buy spot gold and then selling forward (using the gold from your gold asset to deliver into this forward sale).

I would therefore agree that BBs have “exchange rate risk” for the default situation but not for the liquidity situation. This assumes that holders of gold (which in cases of large volume really just means central banks) are willing to sell (in case of default) or lend ( in case of liquidity) to BBs. I therefore suggest the question is not whether central banks are lenders of last resort, but whether they have the capacity, or willingness, to fulfil that role now or in the future.

In my previous post I stated that central bankers are the gold market’s lenders of last resort. The fact that central banks hold gold as a physical asset (and only gold) in addition to fiat currencies is clear indication to me that gold is not just another commodity. However, the other side of this is that central banks can be lenders of last resort of this “money”, just as they are of dollars.

Central banks have been more than willing to lend dollars to banks to help them out with their liquidity problems, eg taking on their crappy mortgages etc, rather then have them fail and to avoid a systematic collapse of the banking system.

Consider the situation where a bank comes to its central bank and say “Hey, I’ve got all these pesky unallocated gold holders wanting physical but all I have is these long term loans. Can you lend me some of your physical gold and I’ll replace it later when those borrowers repay their leases? If you don’t I’ll have to declare bankruptcy, the gold price will rocket up, this will cascade through the gold market and we will have a systematic collapse of the banking system.”

Why would a central bank not be willing to support a bank’s BB division in such a situation, especially when they would do the same for dollars? For me this is not the issue, I think they will do (are doing?) it.

You mention the CBGA as proof that (some) central banks are “are no longer going to be the lender of last resort to this system”. I think it is therefore very interesting that the 2009 statement makes no reference to leasing as the previous two statements did. Why the change?

To me then the key issue is whether the central banks have the capacity”.The interesting thing about capacity in respect of gold of course is that you can’t print it! Easy to do if your bank has a dollars problem, not so if they have a gold problem. Questions to consider:

a. How much gold would central banks be willing to lend to prop up banks? All of it? Or would they balk in the case of gold? Who cares about dollars, just print more – but risk the country’s only real asset?

b. Out of the total they are willing to lend, how much has already been lent?

A speculation: maybe the reference to no more leasing in the 1999 and 2004 CBGA statements was a message to the BB to clean up their books. However, around 2008-09 the banks said they will fail without the backstop, need more time to unwind, have increasing physical redemptions, so CBGA drops the leasing reference to enable them to continue the “extend and pretend that there is not a run on the bullion bank reserves.”

In conclusion, I would like to suggest the following in respect of the two risks

1. Default – This is most likely to happen if the BB lend to a short seller who is now bust. In this case we should see buying and thus an increase in the gold price.

2. Liquidity – As agreed, this will happen if unallocated holders are calling for physical. In this case we should see an increase in the lease rate.

Note that in the past the lease rate was around 1% to 2% with low gold prices, during gold’s bear market. This was because of the large amount of miner forward selling that was going on. What we have seen in recent times with miners closing down their hedging is low lease rates and high gold prices (see this post for a chart). So there is a very general relationship between short selling and lease rates over the long term.

What would be interesting would be sustained increasing gold prices AND higher lease rates, as it may indicate buying to cover defaults and borrowing to cover liquidity.

1. That the gold in GLD has multiple claims on it. Quote: “GLD’s gold bars originated as reserves in the mainstream bullion banking system. That is, they are essentially reserves on loan to the ETF . . . → Read More: Fraud on GLD Holders?]]> Further to my post yesterday, FOFOA left this comment on his blog discussing two risks he sees with GLD:

1. That the gold in GLD has multiple claims on it. Quote: “GLD’s gold bars originated as reserves in the mainstream bullion banking system. That is, they are essentially reserves on loan to the ETF from the bullion bank’s fractional reserves. And the lending of anything always creates a synthetic supply” and “that lent its reserves to paper GLD investors in the first place”

2. That shorting of GLD results in multiple claims on the gold: Quote: “The other side is the lending of this “synthetic gold supply” that creates an additional synthetic supply of synthetic gold. When someone shorts GLD they borrow the shares from someone else. And that same share can potentially be borrowed again and again.”

My short response is I disagree with 1 in respect of “lending” but agree with 2. Now for the long response.

The idea in point 1 that GLD has encumbered gold in it was raised in Catherine Fitts’ “Precious Metals Puzzle Palace” and also Hinde Capital’s “Precious Metals ETF Alchemy GLD – the new CDO in disguise?”

I discussed this issue in this post. If Authorised Participants borrowed physical (or used physical backing their unallocated liabilities to their clients, which is the same thing) and delivered that to GLD, there is no claim or encumbrance by the original lender to the Authorised Participant on those bars held by GLD.

To claim otherwise is to question the entire basis of Allocated gold that the market (and “giants”) operate and rely on, as no giant with a couple of tons of gold can just bury it in their backyard. It would also question the integrity of GATA consultant James Turk’s GoldMoney as well.

The second part of FOFOA’s comment is that any delivery to GLD by a bullion bank of physical gold that was supporting/backing the bullion bank’s fractional unallocated liabilities is a “synthetic supply” that effectively suppresses price by “divert[ing] growing investment demand away from the tightening physical market.”

I would note that for this statement to be true the bullion bank(s) in question must be naked short. Not all Authorised Participants for GLD would have access to the physical to do this, nor would they all be willing to take on such a financial exposure. Question to FOFOA: how many tonnes of GLD do you think are short?

A final point (and FOFOA probably won’t like this conclusion). I would claim that those at risk from this activity are not holders of GLD, but bullion bank unallocated clients because the legal title to the metal in GLD is held by the Trust, not the Authorised Participants or bullion bank unallocated clients.

Now this is a simple legal fact. It does not mean that in any meltdown when fractional claims come home to roost, holders of GLD will survive while bullion bank clients will not. It may happen that the custodians do “take” the gold behind GLD and give it to their unallocated clients first and use the get out clauses in GLD to say they “lost it” or some such other fraud if they are unable to subsequently replace it. Some believe that this is likely behaviour, others that no matter how ruthless bullion banks may be, that they would not engage in such outright fraud. I’ll leave that to you, the reader, to have an opinion on.

FOFOA seems to be sure of this because he thinks that the bullion banks somehow have a special right to the gold in GLD, see this comment:

A place to park your unallocated deposits and sell them for dollars that can then chase an ROI, knowing that the gold will still be there for you to buy back any time it is needed, because you are an Authorized Participant with special rights to the gold.

I do not see how Authorized Participants have any special rights. Once they deliver gold and get GLD shares and then sell them for cash which they then “chase an ROI”, they give up an rights to the GLD share or gold. Yes an Authorized Participant has special ability to redeem GLD shares for gold, but they have to tender the GLD share first, which in the situation above, they can only obtain by buying GLD shares off investors, thus pushing the price up.

If you, the reader, think that it is likely that bullion banks would steal Allocated gold, I would then argue that if a bullion bank was to consider engaging in such fraud, it would not do so with GLD’s Allocated metal because that is an exchange listed product with regulatory, audit and client visibility (through the bar list). Using Allocated metal held by other clients with the bullion bank would be a far lower risk as that is an over-the-counter market arrangement, subject to far less oversight as it is in the “dark”. Again, GLD represents the least risky paper gold – the last to fall, so to speak.

Remember that gold ETFs are only 2,000t out of 30,000t of privately held gold, a fair bit of which is Allocated with bullion banks and other custodians. I think it is a more believable thesis that any short covering, fraud etc is more likely to occur in the over-the-counter “dark” market first, leaving the visible ETFs to maintain the façade that everything is OK.

The point of my discussion above is not to suggest GLD is a safe investment. It is just to introduce a little more nuance beyond a simplistic “GLD is bad because bullion banks involved.”

In respect of point 2 about the shorting of GLD, I would like to see some numbers on that. I am not sure it is as pervasive as implied. This article on ETF shorting in general and ETF settlement fails give a sense of the extent of the issue, but unfortunately GLD is not mentioned.

One final comment by FOFOA:

From my perspective, GLD had the opposite effect on the price of gold (and may have been intended for just that purpose) as it diverted growing investment demand away from the tightening physical market.

All I will say to this is that is was not intended by the WGC for that purpose and there was obsession about creating a product that resulted in “physical offtake”. Whether the vehicle that resulted was the best design is another matter. There seems to be this view that the WGC is part of the “bullion bank conspiracy”. I suggest one look at the membership of the WGC and some of the companies and their involvement in other activities supportive of gold. WGC wanting the gold price to drop doesn’t stack up in my view.

I have been tracking all of these ETFs as well as . . . → Read More: Opening Up Gold’s Distribution Channels]]> Nick from Sharelynx forwarded two announcements to me today, one on Sprott’s new Silver fund and Japan’s first precious metal ETF (actually four of them) where the metal is stored in Japan. The Mitsubishi series name is “Fruit of Gold”, gotta love that.

I have been tracking all of these ETFs as well as other publicly reported storage facilities (eg GoldMoney) since 1999. I gave this proprietary data to Nick to combine with his extensive data sources to create a unique time series of these products, which you can find here if you are a subscriber (and if you’re not you should be otherwise you are operating in the dark re data on the precious metals markets).

I’m sure we will shortly have some article by the gold haters that the growth of these ETFs are another bubble top indicator. I disagree, and would answer by quoting from a strategic paper I wrote for the Mint’s Board in 2001, which probably sounds a bit old hat now:

The demonetisation of gold led to an emphasis on gold as an investment and this was reinforced further with the development of the Krugerrand and subsequent coin programs. However, from this promising start, gold has failed to move with its financial competitors and has thus lost its “market share” of the average consumer’s investment dollar.

What occurred with other investments was a shift from physical to virtual. For example, consumers moved from cash to credit cards, from bank passbooks to account statements, from physical share certificates to electronic registration of holdings. Consumers clearly became comfortable with the virtual form of investments and the convenience they offered. In contrast, however, gold remained physical and therefore became relatively more difficult to purchase and hold.

The result of gold remaining physical was that fewer and fewer intermediaries were willing to offer it to their customers. The two key intermediaries – banks and brokers – stopped offering direct investment in gold because other investment classes, such as shares and mutual funds, were easier to sell. This shrinking of gold’s distribution channels (in some countries it is only available from coin dealers) is it considered to be a contributing factor in the marginalisation of gold as an investment class. Hence, it is not surprising that gold is no longer considered part of a consumer’s investment portfolio.

The arrival of the Internet is accelerating the move to virtual investment categories. Customers will expect to interact through the Internet, especially for “low touch” products such as shares, insurance, and gold bullion. Customers will also increasingly move their banking and investment management online. However, this move will still involve intermediaries, it is just that the intermediaries themselves will become virtual, mirroring the change that has occurred in the financial products they sell. For example, instead of telephoning their broker, investors will trade shares directly with ComSec or Charles Schwab.

If gold is to regain a position on the average investor’s portfolio it must be on the intermediary’s “product list”. The response of the gold industry to the move to virtual forms of investment does not address this issue. Virtual gold is only available via direct-to-consumer models, such as Perth Mint Depository Services or online from businesses such as Kitco. However, this approach requires consumers to find and set-up an account directly with the business concerned. These services are also not suitable for use by key intermediaries such as banks and brokers. As a result, gold is not truly “online” as far as average investors are concerned – it needs to be one of a number of investment options available when consumers ring or log on to their broker.

To do this gold needs to be virtual, as shares are. The difficultly is that, unlike shares or mutual funds, gold is inherently physical – failure to insist on physical backing against customers’ holdings leads to the temptation to issue more “paper gold” and with infinite supply, the price and value of gold becomes meaningless. Physical backing is the key to marketing gold as safer than mere paper assets, as something with intrinsic value.

The listing of ETFs on stock exchanges in my view begins the process of legitimising gold as an investment class in the minds of the average investor. However it is a necessary but not sufficient step – a case still has to be made for gold, it still has to be promoted. But at least it is “on the shelf”.

The other advantage of ETFs is that it brings transparency to what is an otherwise very opaque market. While ETF’s only account for 6-7% of estimated privately held gold, this percentage will increase over time, giving greater insight into the mood of gold investors. Well possibly greater insight, depending on how well analysts read the entrails of changes in ETF holdings.

Holding GLD, meanwhile, is cheaper and more cost efficient than buying bullion outright.

I would note that most gold ETFs have management fees around . . . → Read More: GLD Contango Strategy, or Not?]]> A reader asked me to comment on A GLD contango strategy by Izabella Kaminska. It talks about Paulson & Co earning a return on its $3.4bn woth of GLD shares.

Holding GLD, meanwhile, is cheaper and more cost efficient than buying bullion outright.

I would note that most gold ETFs have management fees around 0.4%. Considering that Bullion Vault’s storage fee is 0.12% and that Paulson would likely be able to get better rates than that from a bullion bank on $3.4bn worth of gold, it would be clear that GLD is not cheaper.

is it actually beginning to vacuum the world’s known gold supply float? Gold supplies, which previously, we might add, would have been put to work by central banks and bullion banks that owned them.

If you look at all ETFs and other storage services for which we have public numbers, together they only total 6.5% of all privately held gold. On top of that you can add the 30,000 or so tonnes of central bank gold. GLD is hardly vacuuming “known gold supply float”.

Given the low costs associated with holding GLD versus pure bullion, as well as the permanent contango in the market — it is quite clear the asset lends itself favourably to the ever popular contango storage strategy

Because GLD is at least 4 times more expensive to hold than an allocated account for someone of Paulson’s size, I’m not sure he could out arbitrage other players.

you buy GLD (perfect proxy for gold, but with no storage costs) you create a hedge by selling front month gold futures. You then lock in the spread further down the curve, and sit and collect the contango premium.

Firstly, GLD does have “storage costs”, that is the 0.4% management fee. The problem with the strategy she proposes is that by selling a futures contract she has hedged the GLD long position. So while you may earn the contango, you won’t make any money on the increase in the gold price because if the gold price increases, then you are losing on your short futures contract.

She has confused trading the basis (gap between spot and futures) with trading the price. You are either doing one or the other, but can’t do both at the same time with the same capital.

It is an interesting development in their strategy. Until 2002, the WGC strategy was to support those selling gold. The 12 August 2002 announcement by WGC . . . → Read More: Why has the WGC bought into BullionVault?]]> On Monday the World Gold Council (WGC) announced that it and Augmentum Capital had completed a £12.5 million funding round in BullionVault in exchange for an equity interest.

It is an interesting development in their strategy. Until 2002, the WGC strategy was to support those selling gold. The 12 August 2002 announcement by WGC of the appointment of James E Burton (ex-CEO of California Public Employees Retirement System) as their new CEO foreshadowed two important changes:

1. a realisation that investment demand, rather than jewelery, was more capable of driving the price higher; and
2. a shift from supporting the industry to sell gold to developing its own “products” and competing against them.

Perth Mint got first hand experience of this new strategy when it was developing its ASX listed gold product in late 2002/early 2003. At the same time a Mr. Tuckwell was developing what would become the first gold ETF in the world. The WGC decided to “take sides” and chose to endorse the Tuckwell product. Needless to say, we weren’t too impressed. They then went on to develop and sponsor many other gold ETFs, the US listed GLD being the biggest.

However, I will concede that considering the cost and work involved in launching an ETF, especially on overseas exchanges, it may have been excusable for the WGC to get involved in developing such products since no one else was willing to (Perth Mint and Tuckwell excepted).

But, given the huge success of the various WGC sponsored ETFs, is it really necessary for the WGC to further compete against others in the industry? After all, the WGC ETFs hold 48 million ounces compared to BullionVault’s 635,000. Does online gold trading have the potential to match the ETFs for impact on the gold price? I doubt it, so what is the WGC’s motivation to extend beyond ETFs?

The Telegraph reports Marcus Grubb, managing director of investment at the WGC, as saying taking the BullionVault stake was part of the Council’s strategy of “increasing its portfolio of successful platforms for gold investment”. Does increasing its portfolio mean WGC will next buy a refinery to make WGC bars, or open WGC coin shops?

Is it a simple case of management empire building, or has WGC management been told to expand its portfolio with the objective of becoming self funding, or are gold miners (the WGC’s members) using WGC as a front to move down the gold value chain without being seen by their shareholders as getting involved in non-core businesses?

I note with interest that IAMGOLD Corporation, a shareholder in James Turk’s GoldMoney (one of BullionVault’s biggest competitors), is also a WGC member. Note that Durban Roodepoort Deep (not a member of WGC) is also a shareholder in GoldMoney. It will be interesting to see if IAMGOLD pulls out of the WGC as a result of their support for GoldMoney’s competitor. It would result in a WGC miners versus non-WGC miners fight in the online gold market.

Bron: You say “custodians of the vast majority of all the world’s . . . → Read More: SLV and Jeff Nielson]]> On Sep 17 Jeff Nielson posted an article on SLV. I took issue with his belief that ETFs’ management fees were unrealistically cheap and thus another indicator they were a scam. Below is the exchange between Jeff and I on the matter.

Bron: You say “custodians of the vast majority of all the world’s bullion-ETFs – a service which they are providing free of charge” but SLV has an expense ratio of 0.50%, some of which if I remember the prospectus correctly, is paid to the custodian. If SLV holders pay 0.50% how can it be considered “free”. By what do you mean free?

Jeff: Hi Bron. Just look at all that is SUPPOSEDLY covered by this 1/2% fee:

1) Transaction costs. Purchases must be made CONSTANTLY, all day long – in order to buy the actual silver for unit-holders at the same price they bought their units at. Given the huge volatility with silver, it’s not even feasible to restrict buying to once a day – since silver has had MANY daily moves of 5% or more.
2) Insurance/delivery costs
3) Storage/security costs.

Obviously BILLIONS of dollars of silver require significant security to guard such a hoard. The U.S. government has an entire military battalion guarding Fort Knox – so no one can find out how much gold is NOT there.If you think these costs are minimal, then answer this question: why do the small number of companies who hold their own bullion need to charge MANY times that premium for their own security/storage costs?

Bron: Before I comment, just want to state upfront that I work for the Perth Mint, but I am speaking here in a personal capacity. While I’m speaking personally, obviously the ETFs are competitors to my employer’s business, both in respect of physical coins and bars as well as our own storage facility, so I’m not any apologist for the ETFs. Taking each of your points in turn.

1) Transaction costs. I note that SLV’s average Bid Ask Ratio is 0.08%. This is very tight but is not necessarily unprofitable for a market maker. You are right that the market maker must be purchasing (or selling) gold constantly as it sells (or buys) SLV shares. My experience with the Perth Mint’s ASX listed product (code: ZAUWBA) is that the market maker will simply set their stock exchange price for an ETF higher than their cost on the wholesale over-the-counter market and adjust this constantly during the trading day. This way they always make a profit on transactions, it is not a cost to them. If individuals bid prices under this than the market maker misses out on a trade. It is only where there are excessive buyers or sellers that the market maker’s prices will get hit.

2) Insurance/delivery costs. Delivery costs are effectively zero, as the metal is most likely already in the vaults as sellers of physical need to bring their metal to London to trade it. Insurance is a real cost, but are easily covered by 0.50%. Important to note that the metal is not fully insured, just the first couple of billion (I don’t think the prospectus says anything about the first loss limit of the insurance). Once you get to a certain size therefore, the insurance cost is a fixed cost, not variable.

3) Storage/security costs. These are fixed costs, once you have a vault and have secured it, every additional ounce does not result in any change in costs. Once you get to the point that you have covered these fixed costs, every ounce above that is pure profit and this is where custodianship can be highly profitable. At 280 million ounces, SLV is definitely there in my opinion. Storage business is a classic case of economies of scale, which is why smaller companies have to have higher storage charges (eg Perth Mint allocated silver is 2.5% pa).

I have been a bit brief on explaining the above, but my view is that they are making money with a 0.5% expense ratio. That is why I think the “free of charge” line of attack is not supported and you are better off focusing on your other criticisms.

Jeff: Bron, at the time that SLV was created, there was only 200 million oz’s of silver in GLOBAL inventories. Now SLV and others hold close to 450 million oz’s. Obviously there MUST be both delivery AND insurance charges for AT LEAST 250 million oz’s of silver – which could NOT have “already been in vaults”.

As for security/storage costs, I’ll happily concede (for purposes of argument) that no new storage space was created. This brings me back to my point about the ludicrous idea of a BANKER (holding a massive short position) SUBSIDIZING “longs” by providing free storage/security.

Even if you subscribe to that ludicrous fantasy, there is still the issue of the “opportunity cost” to banks. Precious metals are not the ONLY items in the world for which there is a demand for high-security storage. Will ANYONE suggest that banks will provide a FREE service for precious metals longs – rather than charge someone a fee for storing other valuable assets? Try asking JP Morgan to store YOUR OWN precious metals for free – and listen to how hard they laugh at you.

Bron: “Obviously there MUST be both delivery AND insurance charges for AT LEAST 250 million oz’s of silver – which could NOT have already been in vaults”

You’ve missed my point. Lets assume the additional 250moz is real and was bought by bullion banks to back SLV & others. In that case, the bullion banks would incur no delivery charges as the seller delivers metal to London at their cost to be able to sell it on the spot market in London. Secondly, the additional 250moz has no insurance charges – as I said, they only insure the first $1b of holdings, not the entire holdings.

“the ludicrous idea of a BANKER (holding a massive short position) SUBSIDIZING longs by providing free storage/security” & “Will ANYONE suggest that banks will provide a FREE service for precious metals longs – rather than charge someone a fee for storing other valuable assets?”

Jeff, you keep on saying they are doing it for free when SLV charges 0.5%. Some of that 0.5% goes to the custodian, they are being paid. That is not “for free” – I don’t understand why you keep on saying they are providing free storage.

The question is whether the 0.5% charge is realistic, profitable assuming the volumes of metal SLV and others hold is physical. As explained in my previous reply it is. Saying this does not mean that they have physical, but nor does it mean they do not.

Jeff: Bron, your assumptions about delivery cost are only valid if you’re implying that silver (and gold) goes straight from refineries into bankster vaults – rather than having to be PURCHASED by the banksters (first) on the open market, and then transferred to their vaults.

When you mention the 0.5% fee charged by SLV, my understanding is that this also (supposedly) covers their OWN administrative costs AS WELL AS all the shipping costs, transaction costs, insurance costs, and storage/security costs.

You would be hard-pressed to find any ONE bankster service (in ANY of their business activities) which they are willing to provide for a 0.5% fee. Suggesting that they are willing to REDUCE their fees (to close to ZERO) to SUBSIDIZE the entry of longs into the market is simply nonsense.

Bron: “your assumptions about delivery cost are only valid if you’re implying that silver (and gold) goes straight from refineries into bankster vaults – rather than having to be PURCHASED by the banksters (first) on the open market, and then transferred to their vaults.”

No it doesn’t. There is no difference between purchasing from refineries or on the open market – refineries are all in different countries just like existing stocks. If market makers cannot acquire metal from investors or sellers already holding it in London, they will actually be able to acquire it at a discount to London spot (which is the usual state of the market), the discount equalling the shipment cost into London. Even if they have to pay a premium (or pay shipment costs into London), then they just factor this into their bid and ask prices quoted for SLV. This is why delivery is not a cost that comes out of the 0.5% fee.

“When you mention the 0.5% fee charged by SLV, my understanding is that this also (supposedly) covers their OWN administrative costs AS WELL AS all the shipping costs, transaction costs, insurance costs, and storage/security costs.”

The 0.5% does cover their administrative and compliance costs, but as I have discussed above and in my previous replies, any shipping and transaction costs are recovered via market making activities, so these do not come out of the 0.5%. As I have also replied, insurance and storage/security are FIXED costs, not variable, whereas the revenue of 0.5% is variable. This means that once you cover you fixed costs, the 0.5% on any additional metal is pure profit.

“You would be hard-pressed to find any ONE bankster service (in ANY of their business activities) which they are willing to provide for a 0.5% fee. Suggesting that they are willing to REDUCE their fees (to close to ZERO) to SUBSIDIZE the entry of longs into the market is simply nonsense.”

0.5% is not “close to zero”. On 280moz, 0.5% = $24 million, that is not anywhere near zero. The fact is that in the wholesale market storage is offered for much less than 0.5%. Do you remember David Einhorn’s Greenlight Capital exiting his GLD in favor of physical bullion? He did this because it was CHEAPER, in other words he could get storage for less than GLD’s 0.4%. In fact, quoting http://www.hardassetsinvestor/:

“By contrast, a $400 million player in the bullion market has substantial room to negotiate. You can be sure his [Einhorn] bullion holdings are being custodied for less than 12 basis points.”

If you believe that 0.5% is an unrealistic fee, a subsidised fee and therefore proof that SLV is a scam, then logically you must also believe that Bullion Vault, with a 0.12% storage fee, is also a scam. This puts you in a bit of a spot, because Bullion Vault is one of the most transparent operations in the market, and favoured by many goldbugs and commentators. Your stepping out on a limb here.

The post above was on Sep 21, Jeff replied to another post on Sep 22 but ignored mine. I posted the comment below on Sep 27. No response by Jeff as at Oct 4.

Bron: You have replied to someone else’s comment which appear after mine, but ignored mine. Does this mean you conceed on the issue of the reasonableness of the storage fee?