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ChrisGraley (29.74)

If I was a Gold ETF...

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June 26, 2010 – Comments (5)

There's a pretty big agreement about manipulation in the Gold and Silver markets, but a lot of speculation on how exactly it's being done by the different entities. 

The following scenario is what I would do if I was a Gold ETF that wasn't fully backed...

If the market in Gold spikes, I would expect more people wanting delivery, because they are only going to want to hold it if it's going up.

Rather than handing out what little reserves that I had or buying high on the open market, I would sell it short.

How would I do that? I would borrow the Gold from a bullion bank and deliver that Gold to the people demanding delivery. This actually increases my reserve levels as people are demanding gold, it helps lower the price for Gold  so it lowers the number of people demanding it. and it allows me to buy gold later to replace what I borrowed when there is less of a demand.

Actually I wouldn't do any of this, because I know what the end-game is, but if I were thinking like an unscrupulous ETF...

If this were actually happening, it would appear like more paper gold is being traded than actually exists. Inflation would seem lower than it should be and ETF's would be slow to deliver.

Sound familiar to anyone? 

Chris, 

 

5 Comments – Post Your Own

#1) On June 27, 2010 at 1:15 AM, kstarich (30.44) wrote:

Chris

I am not sure how effective the ETF's are in price manipulation however, as you know I write extensively on the Comex and do see a strong correlation with the astrology of the coomex chart and price movements.  As an FYI 7-5-10 is flashing on my radar for both the Fed chart and the Comex.  Very hard aspects being made (cardinal t-squares)  I think the price might fall sharply on 7-8-10 and there will be media attention on it 7-9-10. I should write a blog about it soon.

Regards,

Kstar

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#2) On June 27, 2010 at 1:32 AM, SockMarket (41.39) wrote:

wonderful. now we have German spammers, someone should tell Porte.

anyway:

I would am not sure that there would be a noticable increase in physical delivery requests, simply because most of the entities that buy the contracts (ie banks, hedge funds, ETFs, etc.) aren't equipped to handle the real stuff and don't want to pay for its' storage. I would have thought that everyone who was going to take delivery because of the gold bull would already be doing that by now and I don't remember hearing anything about a large jump in physical demand. 

Nevertheless this is eye opening to someone who doesn't pay a ton of attention to those markets.  +1

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#3) On June 27, 2010 at 8:01 PM, ChrisGraley (29.74) wrote:

kstarich,

The ETF's would be a minor player in the manipulation, but if you look at strictly the conflict of interest involved, it raises a ton of red flags.

daniel,

People do request delivery daily, but the big institutions usually don't. I have a feeling that a big hedge fund will eventually short an ETF while at the same time requesting a big delivery. That won't be until that hedge fund finds enough of a weakness to exploit it though.

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#4) On June 28, 2010 at 7:01 AM, XMFSinchiruna (27.75) wrote:

ChrisGraley

The collective body of idle speculation on these issues is now snowballing out of control.

It's time to get back to what we know, and we simply do not know whether or not the bullion ETFs are under-backed. There may well be completing claims written upon that same collection of bullion, but no one can say for certain that the bullion isn't there.

The largest ETFs are simply not designed to support physical delivery, and it is not correct to state that requests for same are made daily. One has to own an entire basket of GLD shares in order to take physical delivery, which represents 100,000 shares of GLD (or roughly 10,000 ounces of gold = $12.3 million). So, if you have invested $12.3 million in GLD, you can arrange for physical delivery through an authorized dealer via a convoluted process designed to dissuade you from doing so. While it is true that hedge funds may one day call the bluff on paper gold more broadly by pressuring the physical supply and demanding delivery from multiple fronts, those seeking physical for any other purpose are far more likely to source from bullion dealers (or even the COMEX) before resorting to the process at GLD.

I agree there is a giant house of cards here in the big picture,m and something is definitely fishy with repect to the largest ETFs (especially their conflict of interest between those huge long positions and the custodians' even larger short positions), but I am trying desperately to help people sort through what is known and steer clear of unsupported speculation when assesing the nature of the risks out there. 

I do not recommend these popular ETFs ... not by a long shot ... but nor do I believe that they have only tolken supplies of physical bullion.

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#5) On June 28, 2010 at 10:46 PM, ChrisGraley (29.74) wrote:

We're both right Sinch, requests are made for physical delivery daily, when you look at gold ETF's overall. You are right that much fewer requests are made on the big ETF's, because they make it very hard to do. You are also right that price-wise it's better to buy from a bullion dealer, but there are still requests to deliver with the ETF's. I think this happens more for research than anything. A hedge fund manager wants to see how a $20 spike in gold effects an ETF's ability to deliver, so he he buys some shares in a shell account and asks for it gift-wrapped. He saves this info for a later time when he'll take advantage of it.

I think that a few ETF's may just have a token amount of reserves, but I think that most have at least 50% reserves. That may not be enough though, the way gold has been manipulated.

Anyone not fully backed will still be buying gold in a mad rush once the manipulation is exposed.

It will hurt some funds more than others, but it will still hurt. 

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