Sunday, April 4, 2010

How Safe Are Gold ETF's?

Janet Tavakoli has emailed a link to me of a long version of an article (Pdf)  she wrote for HuffPo outlining, "How to Corner the Gold Market."

What I found most interesting in her paper is her instructions to the would be gold corner operator on  how to deal with Exchange Traded Funds:
Get your buddies in the financial business to offer exchange traded gold funds (ETFs) that claim to buy physical gold. This will sound safe to retail suckers investors, but in fact, the ETFs are very risky. This will serve your purpose when you are ready to start a panic. These particular ETFs will allow the “gold” to be commingled with the custodian’s gold, and the custodian can lease out the gold. Moreover, the “gold” custodian can give it to a sub custodian that the manager doesn’t know. The sub custodian can give it to yet another sub custodian unknown to the original custodian. The manager will never audit the gold, and the gold is not “allocated” to a particular investor. Since this is an “exchange traded” gold fund, investors will probably assume the gold is regulated by the Commodities Futures Trading Commission (CFTC), but it isn’t. By the time investors wake up to the probability that there is very little actual gold backing their investment, your plan will be ready to execute.
There is a lot of odd stuff going on in the paper,electronic and depository gold business. Nathan Lewis writes (Thanks to Krassimir Petrov)
Four 400 oz. LBMA standard bars were discovered to be tungsten counterfeits in Hong Kong. This set off a wave of investigations, turning up more such phony bars worldwide.

These were very high quality counterfeits. According to some investigators, it appears that the original source and creator of these counterfeits was the U.S. government itself. Some people put the possible number of counterfeit bars out there in the hundreds of thousands!
Bottom line, to the degree possible. i.e. unless you are short-term tarding, take delivery of your gold and make sure it is gold! Here's Lewis again:

There is an easy way to sidestep all the scams, frauds, and phony nonsense. Take delivery on your bullion, whether a 1 oz. Kruggerand or a truckload of 400 oz. institutional bars. Put it in an independent, insured depository that is not affiliated with any bank. Assay all the holdings for tungsten counterfeits. Then audit it periodically, for exact serial numbers and specified weights.


  1. Tavakoli's article is entertaining. Is Ms. Tavakoli inferring in a rather obtuse manner that the gold should be shorted?

  2. I certainly agree that Tavakali is "entertaining." I don't believe, however that she is offering any investment advice or strategy. It makes for a good story by resurrecting the Hunt brothers silver debacle. Her style is to be a critic-- we all do love her attempts at male locker room banter (Calling Michael Lewis a "girlie-man"). A colorful critic of the financial markets and its high-profile players, yes; investment strategist, no. She is not a fund manager of any stripe or experience. It seems her "business" is to be some form of industry gadfly for the media and analyst to aid vulture lawyers pick the bones of the financial market's carrion. A good story yes, investment advice no.