The Great ETF Gold Scam

by | Mar 31, 2010 | Commodities, Precious Metals | 10 comments

Do you LOVE America?


    Whether you are planning for a collapse of our economic system, or simply want to diversify your assets in such a way that you don’t lose everything all at once in a massive stock market or real estate crash, gold is an investment you’ve probably considered.

    In the past, we have suggested that the ideal way to invest in gold (or silver) is to purchase the physical metal. We’ve also discussed owning stocks of companies that own and operate gold mines as an alternate way to invest. Though it’s not as safe as holding the physical metal for a number of reasons, it’s better than nothing. A new investment vehicle which has popped up over the last several years, that also allows investors to ‘buy’ gold is the exchange traded fund, or ETF.

    An ETF trades just like a stock, and some ETF’s like the Market Vectors Gold Miners ETF actually hold ownership of mining companies in the form of stocks. Purchasing an ETF like GDX is essentially like purchasing a basket of gold mining companies (over 30), helping you to diversify your risk across the entire industry as opposed to betting on a single company to perform.

    But not all ETF’s are created equal, and some purport to invest directly in specific commodities like oil, silver or gold. Many investment advisers, recognizing investors’ need for safe assets, have offered their clients the opportunity to buy gold via these commodity based ETFs. And in recent months, some of these precious metals ETFs have seen massive inflows of capital. The problem, of course, is that while investors believe these gold commodity ETFs to be the equivalent of purchasing the physical metal, nothing could be further from the truth.

    Janet Tavakoli of Tavakoli Structured Finance, Inc. discusses gold commodity ETF’s and how investors may be getting set up for wealth destruction in How to Corner the Gold Market:

    Pump up the gold story. Get your friends to tell retail investors to buy some gold every month. 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 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.

    Investing in these types of gold assets is fine if you understand that you are buying “paper gold,” and that you are subject to counter party risk in the event that someone can’t deliver the gold and your ETF paper holding could essentially become worthless in a market sell-off.

    Of course, your adviser may argue that these assets are regulated and there is nothing to worry about. If this is the case, it’s likely that the same adviser was saying the same thing about mortgage backed securities in 2007. So be sure to cross-check anything your adviser tells you.

    Karl Denninger, of Market Ticker, weighs in on the serious possibility of the gold ETF scam:

    What happens if Janet’s scenario is correct?

    Panic, that’s what. A global market meltdown in which a handful of huge banks (who are very, very short in the futures market) suddenly get assigned for delivery – and yet they don’t have, and cannot acquire, enough physical gold to make delivery, because their open interest (in aggregate) exceeds the free supply available to trade.

    This bankrupts these large dealers.  It also bankrupts the ETFs, who suddenly are “discovered” as having “leased” out all their gold – that is, they’re holding worthless paper promises to replenish their depository written by someone who has unfortunately become insolvent.

    The “gold bugs” (those who hold physical metal) are of course very happy by this course of events, as the “spot” price would go to the moon – instantly.

    Is this what’s going on?

    Who knows.

    It certainly is the allegation and the number of people running stories that lead you to this conclusion over the last few months has reached a fever pitch.

    But before buying into this story on either side be aware that when this was attempted by the Hunt Brothers with silver (and it was nearly the same path that Janet outlines in her article) the CFTC and other “regulators” in the market came in and changed the rules.  The danger here can be extreme, as most people with physical metal (the only people who will benefit if there is a monstrous spike in price – if you’re holding an ETF you will in fact likely get nothing!) cannot dispose of it fast enough to take advantage before the inevitable collapse on the back side of the cornering attempt occurs.

    When the Hunt Brothers attempted this silver went from $11/oz to nearly $50 in less than four months – but two months later it had collapsed to below the original $11 price, with much if it happening in a literal single day.

    [emphasis added]

    For those holding real, physical metal, you could see a massive rise in the price of gold rather quickly. Of course, if you don’t realize profits at the right time, then you could see your precious metals turn around and go the other way just as quickly.

    In addition to alerting potential gold investors of the dangers of commodity based ETFs, we want to publish this information for those holding physical assets.

    There may come a time when this scenario actually does play out, in which case, you may have just a small window of time to realize some of your profits. Your decision to eventually sell your precious metals will be dependent on a variety of factors including your personal financial position, the state of the global economy, what the US dollar is doing, and overall sentiment of the consumer. But, one of the signs of a “top” in gold, or at least an intermediate “top,” could be an event such as mass defaults in the paper gold markets. Keep an eye out for it, because if it were to occur, it could be a once in a lifetime opportunity to realize massive gains in a short period of time.

    Buying gold and silver is fine, but in addition to understanding why you buy and hold precious metals, you should have some ideas as to why you might want to sell and what signs to look for. (Some thoughts on When to Sell from McAlvany Weekly Commentary)

    Video of GATA Chairman Discussing CURRENT Paper Gold/Silver Manipulation Schemes

    Andrew Maguire, a precious metals trader in London has the inside scoop on exactly how the big banks (i.e. JP Morgan) are manipulating prices and has predicted specific market movements days in advance because of knowledge gathered from the actual manipulators.

    This is real, it’s happening right now, and if you’re in paper gold related commodity assets (Not actual gold producing companies or ETFs like GDX or GDXJ) then you stand to lose a substantial portion of your investment.

    It is a matter of time before this fake asset bubble detonates and takes millions of unsuspecting investors with it.


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      1. Comments…..The reason so many people are becoming poor while at the same time the minority of billioners have almost

      2. Comments…..The reason so many people are becoming poor while at the same time the minority of billioners have almost doubled their wealth is this, in the world of economics there is no destruction of wealth only the transfer of wealth, how does this happen? The art of specualtion, the Elite know what ill educated suckers we’ve become, their motto “It is by the art of speculation that we shall shift all their wealth down to our classes”. So for all you who bought paper gold if have any money left over I have a bridge in Irag for sale, and if you’re not happy with you purchase I promise I will pay you back when my brother straightens out, there is only one problem he’s a hunchback.

      3. Mac,  Great work on the site!  Thank-you so much for all the time you spend researching and writing.

        I beleive people hold physical metal to protect and store purchasing power against the decline of  fiat currency and therfore may not be interested in trading it for ever weakening paper dollars.  Gold & silver are quickly becoming the only forms of real money left. 

        To hold the notion that the price of gold and silver will skyrocket and then collapse after a MAJOR ETF default is pure fiction.  Mr. Denninger is correct in that once a default occurs, the price of Gold will head skyward.  However, it is this event, in my opinion, that will disconnect the price of physical gold from the price of paper futures contracts.    At that point, I beleive we will see the gold price taken over by the law of supply and demand.

      4. People, check out Lindsey Williams Youtube videos.  He explains how the elitists are going to break the finances of all Americans by 2012.  

        Obama is the elitists obedient puppet.  He is implementing their plan to destroy you. 

      5. THIS is some interesting $#!^…very interesting indeed…

        Like Denninger suggested, just keep your bowl of popcorn handy and be ready to watch the fireworks.

      6. PM ETF’s like GLD and SLV are useful as trading vehicles .  They are not for long term holding assuming you are hedging against inflation or disaster.  They are paper, like FRN’s, and are eaasily manipulated by Wall St. thugs.  Physical gold and silver is the ONLY way to hold PM’s for long term, and should not be bought with short term profit in mind but as a means to protect the value of your capital over long term.  Buy and forget and, if you are wise, KEEP YOUR PIE-HOLE SHUT ABOUT IT!!  The fewer people that know you hold physical PM’s close the better.

      7. Are certificates for gold in the Perth Mint the same as “paper gold”?

      8. Perth mint certs are a bit different. You are, essentially holding a piece of paper, but your counter-party is the Perth Mint exclusively, as opposed to multiple counter-parties that exist with gold commodity ETF’s. If you trust the Perth Mint, and from the research I have done in the past they seem to be a legitimate institution, then Perth Mint certs might be a good diversification option. If I remember correctly they are closely controlled by the Australian govt.

        Also, if I remember correctly, there are two types of certs, one type is a a cert that specifically allocates a specific numbered bar to you, while the other type is an unallocated type certificate which does not reserve a specific piece of gold.

        To redeem your cert, you would do it through your Perth Mint broker, i.e. Euro Pacific Capital, OR, if I understand correctly, you can take the cert directly to the mint to receive your allocated/unallocated gold.

        There remains a counter-party risk and also the problem of getting your physical gold because you would have to travel to Australia to redeem, but if you are diversifying into multiple gold “products” like stocks and physical, then Perth certs might be a good alternate option.

        They come highly recommended by advisers like Peter Schiff of Euro Pacific Capital.

      9. I have aweb site where I give investment advise on penny stocks and stocks under five dollars. I have many years of experience with these type of stocks. If their is anyone thats interested in these type of stocks you can check out my web site by just clicking my name. I would like to comment about commodity exchange traded funds. These are called exchange traded notes if I have it right they use futures contracts to attempt to track the price of gold silver copper or some other commodity. I still think the jury is out on this one. Sometimes these things seem to work well tracking the commodity their suppose to track other times not so much.

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