COMEX Gold and Silver in slight backwardation ...

[gonegolfin]

... again. They first entered into backwardation on Tuesday and Wednesday (first time in history (at least for Gold) - on close) of last week.

COMEX Gold ...
Gold (Globex) Futures Price Quote
The January contract is down $1.60 from the December contract. However, much more importantly, the front month contract (February) is down $0.10 from the December contract.

COMEX Silver ...
Silver (Globex) Futures Price Quote
The January and February contracts are down from the December contract. But the front month contract (March) is still slightly higher ($0.04) than the December contract.

Brian

 

[Toro]

Brian

The gold silver ratio is 80:1. What do you think of that?

 

[gonegolfin]

Brian

The gold silver ratio is 80:1. What do you think of that?

Well, on the surface I would say that Silver is getting hit harder due to recessionary and deflationary fears due to its significant use as an industrial commodity. I think it also says that Gold has had some safe haven buying in the last several months. This is supported by the fact that there has been significant physical buying during this time period. Even ETFs (not physical) have increased (as they have for Silver).

Brian

 

[Toro]

Do you think a pair trade of long silver/short gold would be profitable? The ratio has averaged 60:1 over the past 15 years and 65:1 since 1980. It was ~55:1 in August.

It got has high as 120:1 in the 1980s. Do you have any idea why that was?

 

[gonegolfin]

Do you think a pair trade of long silver/short gold would be profitable? The ratio has averaged 60:1 over the past 15 years and 65:1 since 1980. It was ~55:1 in August.

It got has high as 120:1 in the 1980s. Do you have any idea why that was?

Based on the historical ratio, it looks like a good trade. But I would not touch it.

#1 I would not want to be short Gold at this point in time for many reasons. Gold probing backwardation is one reason. Another is that physical buying has been intense. Also, the Fed has flooded the banks with massive reserves which could make their way into the money supply ... with the result possibly being stagflation or a reflation.

#2 If we do enter a deflationary (money supply contracting) recession or depression, Silver will get hammered. But I am not at all convinced Gold will go down much from here. I think it continues to be a safe haven.

I think that we will need to see inflation and more confidence in the world economy for Silver to move significantly higher. Or a COMEX default (or long term backwardation), which I think is unlikely.

IOW, I think the ratio could just as well get worse from here as better. I just continue to have long positions (physical metal) in Gold, Silver, the US Dollar, and some selected foreign currencies for now. But I do have some long trading positions in Gold and Silver from time to time (none at present).

As for the 1980's, I would need to check the charts. But the ratio may have gotten out of whack when the Federal Regulators forced liquidations of the Hunt Brothers' long Silver positions. Meanwhile, Gold was on a tear at the time. Or, it is possible it happened immediately prior to the Hunt brothers establishing their positions (Gold moving up towards $850 while Silver was still lagging).

Brian

 

[Toro]

Here is some context.

I have daily data that only goes back to 1984. This is the ratio since that time.

The price of gold

The price of silver

As you can see, from 1984 to 1991, the ratio rose from 40 to 100. My guess - and I emphasize the word "guess" because I don't know - is this happened because of a rise in the supply of silver.

You can see that the spike in the ratio over the past few months is unprecedented, at least over the past few decades. When a pairs trade moves that hard in the short-term, my inclination is that there is something out of whack.

Now, I have not checked the shape of the futures curves for both metals - I'll check that next week. However, the ratio on the December 10 contract is 78, very similar to the spot ratio.

What do the curves being flat tell you? Normally, gold and silver are in contango, are they not? Also, why does it matter that there is intense buying of the physical if I execute the transaction in the futures market or the swap market, say off the Dec 10 contract?

Why do you think gold will not get hammered in a deflationary environment? Gold has fallen 30% from its highs. It was presaging the end of inflation. If all this money that was created around the world flowed into the gold market over the past five years is now being destroyed and we are in a deflationary cycle which means that the money supply is contracting, if all real prices of assets are falling, why would gold be spared? It is economic logic that gold would fall. Gold held up in the Depression because the price of gold was fixed by the government. Its not fixed now.

It is interesting to note that the Dec 11 oil futures price is $70, nearly $30 higher than the spot price, though that's down $5 this week, and the steep contango be a reflection on future supply concerns more than anything.

 

[editec]

Any idea what effect the change from film to digital is having on the price of silver?

Anyone have any idea if, based on atom weight and probability statistics, the ratio of silver V gold that we currently have is in any way in relation to the probable amount of gold and silver that exists on this planet?

 

[gonegolfin]

You can see that the spike in the ratio over the past few months is unprecedented, at least over the past few decades. When a pairs trade moves that hard in the short-term, my inclination is that there is something out of whack.

The futures market is out of whack.

Now, I have not checked the shape of the futures curves for both metals - I'll check that next week. However, the ratio on the December 10 contract is 78, very similar to the spot ratio.

What do the curves being flat tell you? Normally, gold and silver are in contango, are they not?

Not just normally. Always. Gold has never been in backwardation with respect to the spot price. There has been a time where some of the contract months were in backwardation for a few hours. We are in uncharted waters. It may resolve itself with additional COMEX supply. But if not and we enter into a significant backwardation for a non-trivial period of time ...

Also, why does it matter that there is intense buying of the physical if I execute the transaction in the futures market or the swap market, say off the Dec 10 contract?

Because there is now less trust in the futures market. There is less trust that the metal will be there, hence the temporary backwardation. A nice arbitrage was setup last week where spot metal could be sold into the market and a futures contract could be bought back for less. But if there is no confidence that the future metal will be delivered, folks will not part with their metal in such a trade. This is bad news for the futures market and extremely bullish for Gold. But it is important to note that while this is significant news, the backwardation we have seen thus far is minor and has not been consistent ... yet.

Significant physical demand has manifested itself in the physical coin and billion markets, the ETFs (which continue to build holdings), and now physical demand in the futures market. Gold and Silver delivery demand is on pace to exceed the high numbers since I have been watching these markets.

You can see the delivery notices for Gold, Silver, and Copper on this page ...
NYMEX.com: Gold
Through Friday (12/5), 12,164 December Gold contracts were submitted for delivery (1.2164 million ounces). 5466 Silver December contracts were submitted for delivery (27.33 million ounces).

Warehouse stocks can be found here ...
NYMEX.com: Metal Warehouse Stocks
For some reason, the warehouse stocks report was not updated on Friday (12/5). The COMEX currently has a max of 2.918 million ounces available to satisfy delivery demands (the actual number is less, potentially much less).

Why do you think gold will not get hammered in a deflationary environment? Gold has fallen 30% from its highs. It was presaging the end of inflation.

Gold has fallen nearly 25% from its closing high on the futures markets. The physical price has been higher since March (even moreso for Silver).

I do not think it will get hammered because the increased flow into the physical metal has shown that it is being considered a safe haven, even if the paper futures market shows it to be less so (but it has been holding up here as well).

As for the end of inflation, I think it is a hiatus for inflation. I think that the massive monetary reserves that have been pumped into the system will eventually make its way into the money supply (via lending or investment by the banks). Although, I think it may take a year or more. If it does not, equity markets will get hammered.

I should also mention that the current COT levels are very bullish for Gold. So, weighing all of these factors in this post, I am not shorting Gold.

It is interesting to note that the Dec 11 oil futures price is $70, nearly $30 higher than the spot price, though that's down $5 this week, and the steep contango be a reflection on future supply concerns more than anything.

And/or the expectation that demand will be back by then. Which will mean somewhat of a reflation.

Brian

 

[gonegolfin]

Any idea what effect the change from film to digital is having on the price of silver?

Not much, according to Silver expert Ted Butler. Any negative effect on demand has been at least offset by the many other new uses for Silver, according to Butler. Yearly silver demand continues to outstrip yearly mine supply.

Anyone have any idea if, based on atom weight and probability statistics, the ratio of silver V gold that we currently have is in any way in relation to the probable amount of gold and silver that exists on this planet?

Much has been written about the amount of above ground stocks of Silver versus Gold. Some claim that above ground Silver is more rare than above ground Gold (and go to significant lengths to prove it so). I do not believe this, but I think the gap has narrowed.

Brian

 

[Toro]

Brian

If there is a shortage of the physical, why aren't the ETFs higher?

 

[Paulie]

Brian

If there is a shortage of the physical, why aren't the ETFs higher?

Manipulation?

 

[gonegolfin]

Brian

If there is a shortage of the physical, why aren't the ETFs higher?

The ETFs track the futures price. The ETFs are not truly physical. If you cannot demand delivery, it is paper. ETF holdings of Gold and Silver have grown since the March highs, not fallen as the price would have you believe.

The other thing to take into consideration (taking Silver as an example) is that there is more of a shortage in retail Silver than in industry bars (1000 oz. bars). It makes sense that coins and 100 oz. bars would experience a shortage first. But now savvy investors have been playing this by purchasing 1000 oz. bar Silver (and 100 oz. bar Gold) cheaply via futures and taking delivery. As a result, we have experienced some slight backwardation and significant amounts of Gold and Silver leaving the COMEX warehouses.

Brian

 

[BaronVonBigmeat]

Of course, it is too early to say whether gold has gone to permanent backwardation, or whether the condition will rectify itself (it probably will). Be that as it may, it does not matter. The fact that it has happened is the coup de grâce for the regime of irredeemable currency. It will bleed to death, maybe rather slowly, even if no other hits, blows, or shocks are dealt to the system. Very few people realize what is going on and, of course, official sources and the news media won’t be helpful to them to explain the significance of all this. I am trying to be helpful to the discriminating reader.

Gold going to permanent backwardation means that gold is no longer for sale at any price, whether it is quoted in dollars, yens, euros, or Swiss francs. The situation is exactly the same as it has been for years: gold is not for sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn, whether it concerns newly mined gold, scrap gold, bullion gold or coined gold. I dubbed this event that has cast its long shadow forward for many a year, the last contango in Washington ― contango being the name for the condition opposite to backwardation (namely, that of a positive basis), and Washington being the city where the Paper-mill of the Potomac, the Federal Reserve Board, is located. This is a tongue-in-cheek way of saying that the jig in Washington is up. The music has stopped on the players of ‘musical chairs’. Those who have no gold in hand are out of luck. They won’t get it now through the regular channels. If they want it, they will have to go to the black market.

...

Here is the fundamental difference between the monetary metal, gold, and other commodities. Backwardation will pull in stocks from the moon as it were, if need be. The cure for the backwardation of any commodity is more backwardation. For gold, there is no cure. Backwardation in gold is always and everywhere a monetary phenomenon: it is a reminder of the incurable pathology of paper money. It dramatizes the decay of the regime of irredeemable currency. It can only get worse. As confidence in the value of fiat money is a fragile thing, it will not get better. It depicts the paper dollar as Humpty Dumpty who sat on a wall and had a great fall and, now, “all the king’s horses and all the king’s men could not put Humpty Dumpty together again.” To paraphrase a proverb, give paper currency a bad name, you might as well scrap it.

Once entrenched, backwardation in gold means that the cancer of the dollar has reached its terminal stages. The progressively evaporating trust in the value of the irredeemable dollar can no longer be stopped.

Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks. They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system. Their instrument is the ownership of monetary gold. They blithely ignore the siren song promising risk-free profits. Indeed, they could sell their physical gold in the spot market and buy it back at a discount in the futures market for delivery in 30 days. In any other commodity, traders controlling supply would jump at the opportunity. The lure of risk-free profits would be irresistible. Not so in the case of gold. Owners refuse to be coaxed out of their gold holdings, however large the bait may be. Why?

Well, they don’t believe that the physical gold will be there and available for delivery in 30 days’ time. They don’t want to be stuck with paper gold, which is useless for their purposes of capital preservation.

...

If the governments of the great trading nations had really wanted to save the world from a catastrophic collapse of world trade, then they should have opened their mints to gold. Now gold backwardation has caught up with us and shut down the free flow of gold in the system. This will have catastrophic consequences. Few people realize that the shutting down of the gold trade, which is what is happening, means the shutting down of world trade. This is a financial earthquake measuring ten on the Greenspan scale, with epicenter at the Comex in New York, where the Twin Towers of the World Trade Center once stood. It is no exaggeration to say that this event will trigger a tsunami wiping out the prosperity of the world.

Kitco - Commentaries - Antal Fekete

Welp...I sure hope he's wrong!

Let me see if I understand this correctly though: too much paper chasing too much gold, like a game of musical chairs? And the holders of physical gold don't want to be the ones left standing, even if that means giving up virtually guaranteed profits?

 

[BaronVonBigmeat]

Another article by Prof. Fekete:

Here is an update on the backwardation in gold that started on December 2. It continued and worsened on December 3, 4, and 5. So far this is the most serious signal of the economic crisis: the world is rushing headlong into a Great Depression, possibly worse than that of the 1930’s. Please remember the following analogy: the serial devaluation of currencies starting with that of the British pound in 1931 meant a drastic drop in the velocity of gold circulation. This spelled a contraction in world trade that proved catastrophic to employment and economic health in general. The gold confiscation in America in 1933 only made things worse, in particular, it was the direct cause of the decline in interest rates that, in its turn, was the chief cause of the widespread destruction of capital and bankruptcies. I have discussed this correlation elsewhere.

Right now the backwardation in gold also means another drastic drop in the velocity of gold circulation, and it will also cause a tragic contraction in world trade. It will also be catastrophic to employment and economic health in general. Interest rates will continue to fall with a deleterious effect on capital. I don’t see that confiscation of gold is in the cards this time. It could not be enforced. People would not comply. Gold confiscation is a trick that can only be pulled off once. A con-game won’t work for the second time.

...

I have received several inquiries how to explain the simultaneous occurrence of gold backwardation and a further fall in the price of gold. Here is my answer. Comex is at the verge of bankruptcy, at least as far as its gold trading is concerned. The trouble is twofold.

First, Comex has a problem that the shorts are overextended opening themselves to a squeeze or, ultimately, to a corner. These are attempts on the part of gold bulls to buy up the gold certificates, instruments of delivery against gold futures contracts. These certificates give you legal title to the metal deposited in Comex-approved warehouses. Such a squeeze would cripple the operation of the exchange and make Comex lose its credibility as a viable market. When the cupboard is empty, the game is up.

Second, Comex can no longer attract sufficient quantities of gold from investors to its warehouses which, in consequence, get more and more depleted. Such a gold flow is the lifeblood not only of Comex, but of the irredeemable dollar as well. There is a world of a difference between the irredeemable dollar with the gold window of Comex open, and the irredeemable dollar with the gold window of Comex closed. The institute of the gold futures market is the prop keeping the global game of musical chairs of fiat money going. The music stops when Comex closes its gold window.

But Comex will eventually have to declare “liquidation only” policy, effectively closing its gold window. The phrase means revoking the right of holders of contracts to demand delivery on their expiring gold futures under certain circumstances. Clients have to accept settlement on their contracts in cash. This has happened in the past, e.g., in silver and palladium, although it has never happened in gold. It is not widely known that Comex would not go bankrupt de jure if it declared “liquidation only”. Small print in the contract makes allowance for this option in case of force majeure. Nevertheless, Comex would be considered bankrupt de facto in the eyes of the public if it declared “liquidation only” on its gold futures contracts. Comex is the residual source of the world’s only currency that is not the liability of some government, gold.

Moreover, by implication, it would also be the end of the irredeemable dollar as we know it. I am convinced that the managers of the irredeemable dollar are not afraid that their prodigious dollar proliferation policy endangers the value of the currency, Quantity Theory of Money notwithstanding. What they are afraid of is that the gold bulls will force Comex to close its gold window by cornering the supply of gold certificates. When that happens, it will be not only “gold is not for sale at any price” but also “oil is for sale only against payment in gold”.

We have to understand that what has kept up the paper dollar’s value through thick and thin, through war and peace, and through the burgeoning trade deficits and budget deficits since 1975, is Comex. This is the reason why the Chinese still take the irredeemable dollar in payment for real goods and services, and large quantities of food can still be purchased against payment in irredeemable dollars. But once Comex is forced to close the gold window, the dollar will lose its main prop and bearings and, with them, its purchasing power, even if miraculously the U.S. could cut its trade and budget deficit to zero.

The Quantity Theory of Money is no science. It is a model, a didactic tool. It is applicable to an imaginary linear world. This world of ours, however, is highly non-linear.

I am convinced that the clearing members of Comex are desperately trying to avoid permanent backwardation in gold. Not only is the gold futures market extremely profitable for them, but their bets have been backed by central banks gold sales and leases. All the central banks have a vested interest in maintaining the global regime of irredeemable currency. The clearing members want to have their cake and eat it: they are the consistent short sellers who keep the gold price from breaking out on the upside. But this makes gold cheap causing mass withdrawals of gold from the warehouses, gold which they want to keep in the warehouses for window-dressing purposes.

...

But something ominous is happening. Most recently central banks have changed their policy. They have stopped selling and leasing gold. Their commitment to bail out the clearing members with gold has been changed to a commitment to bail them out with paper. This is not the same thing. Central banks have stopped feeding the market with gold sales and leases. Here is the proof.

...

Mr. Brown can print pounds galore, and even swap them for dollars. But he cannot print gold. Neither can his colleague, Helicopter Ben. That’s why he is willing to airdrop an unlimited amount of paper, but would not airdrop even one grain of gold to alleviate the economic crisis of his own making. These gentlemen still think that the present crisis is a subprime crisis and it can be tackled by flooding the system with newly created money. Scarcely do they see that, instead of being a real estate crisis, a stock market crisis, or a banking crisis, this is a gold crisis. It can only be resolved by involving gold, in particular, by remobilizing the world’s gold reserves. The most straightforward way of doing this would be to open the U.S. Mint to gold (more precisely, to the seigniorage-free and unlimited coinage of gold on private account), as Sir Isaac Newton, Master of the Royal Mint of London had done in the year 1717. Unfortunately, this option is no longer available because the trust in the irredeemable dollar has been fatally undermined by the backwardation in gold. No longer will people be coaxed out of their physical gold by the promise of risk-free profits, however large, payable in paper.

One possible explanation of the backwardation in gold is that the clearing members of Comex, who could have prevented it from happening by allowing gold to break out on the upside, have changed tactics and decided to step aside and let backwardation do the job. They hoped that it would pull in gold from the moon. The risk-free profits that backwardation promises to yield would tempt holders to swap cash gold for paper gold.

Well, so far it is not happening. Fewer than 10,000 ounces of new gold was registered at the warehouses during this episode of backwardation so far, not enough to deliver on even 100 contracts. By contrast, an extra 132 December contracts were presented for delivery by their holders.

A second possible explanation of the backwardation in gold and the decline of the gold price to $740 on Friday, December 5, is that the clearing members in desperation attempted to demoralize the bulls by their persistent selling of cash gold and December futures. Hefty margin calls went out to intimidate holders of the December contract. But the tactic seems to have backfired: while both the cash price and the December futures price fell, the futures price fell more. Backwardation was the result. The bulls refused to swap their cash gold for the December futures, in spite of further decline in the basis (making the swap more tempting still). The contest between the good guys (longs standing for delivery) and the bad guys (the clearing members) may not be resolved until December 31, the last day when the latter must deliver, or declare ‘liquidation only’. Right now it looks as if the longs are quite prepared to call the bluff. They are willing to face further decline in the gold price to force the issue. They know full well that the last thing the clearing members want is to declare force majeure, because that would kill the goose laying the golden eggs for them.

Please remember that the bad guys have another secret weapon. They can raise the margin requirement to any level higher than the value of the underlying contract. Nasty, isn’t it? The idea is to force the longs to sell their contracts and, in doing so, give up their right to take delivery. Such a measure, however, would betray the utter helplessness of the clearing members. It would be oil on the fire, triggering a world-wide rush into cash gold, ruining other paper gold markets (including ETF’s) in the process.

A third possible outcome is that all the gold demanded will be delivered in December, and the deterioration in the warehouses’ holdings will be papered over in January. No matter, the battle is already shaping up for the February confrontation when the bad guys will be in an even weaker position.

To sum up, the gold price is not the issue right now. The low gold price is a side show trying to scare the longs out of their cash gold positions. Here the iron rule of the commodity markets applies: you can squeeze the bears, but you can never squeeze the bulls. The reason is that the best you can do to shake the bulls out of their position is to tempt them with risk-free profits to give up physical gold against future gold. That is happening right now. But it appears that, for the first time, cash gold can no longer be coaxed out with paper profits. After all, gold is gold, and paper is paper.

This is why this battle is so crucial: it is the first real confrontation between physical gold and the paper dollar. Paper gold is marginalized. We know that, in the long run, the paper dollar cannot stand up to physical gold. However, as Keynes has warned us, in the long run we are all dead. This time it’s different. The long run ends on December 31, 2008.

The “last contango in Washington” refers to the end of the hegemony of the irredeemable dollar that is in no position to throw its weight around any more. The advent of backwardation means that a writing has appeared on the wall: “Mene tekel, upharsin”: the dollar has been weighed and found wanting. On the last day of this year of economic and financial surprises we shall know whether the backwardation in gold is permanent, or whether it will become permanent only after the inauguration of the new president, at the expiration of the next active gold futures contract in February.

Either way, this is a contest the bad guys cannot win. They are at the end of their rope. The low gold price means that they are left with just enough rope to hang themselves.

"Has the Curtain Fallen on the Last Contango in Washington?" by Antal E. Fekete. FSO Editorial 12/08/2008

 

[Toro]

The ETFs track the futures price. The ETFs are not truly physical. If you cannot demand delivery, it is paper. ETF holdings of Gold and Silver have grown since the March highs, not fallen as the price would have you believe.

I did a quick search and couldn't find anything on EDGAR, but this is the description on Yahoo Finance.

FUND SUMMARY
The investment seeks to strive to reflect the performance of the price of gold bullion, less the Trust’s expenses. The Trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the Trust terminates and liquidates its assets, or as otherwise required by law or regulation. The Trust is not managed like an active investment vehicle, and it's not registered as an investment company under the Investment Company Act of 1940.

GLD: Profile for SPDR GOLD SHARES - Yahoo! Finance

I always thought the ETFs held gold. That was one of the bullish cases to hold gold when they were created, that they would hold actual gold.

 

[Toro]

Actually, I found it. On page 64 of the 10K. As of September 30, the GLD held 23.268 million ounces of gold.

It says on p1

The Trust will not hold or trade in commodity futures
contracts regulated by the Commodity Exchange Act, or the CEA, as administered by the Commodity
Futures Trading Commission, or the CFTC.

On p2 it says

The Trust’s assets only consist of allocated gold bullion, gold credited to an unallocated gold account,
gold receivable when recorded; representing gold covered by contractually binding orders for the
creation of shares where the gold has not yet been transferred to the Trust’s account and, from time to
time, cash, which will be used to pay expenses.

On p19 it says

The Custodian is
responsible for allocating specific bars of gold bullion to the Trust Allocated Account.

And on p23

Custody of the gold bullion deposited with and held by the Trust is provided by the Custodian at its
London, England vaults. The Custodian will hold all of the Trust’s gold in its own London vault
premises except when the gold has been allocated in the vault of a subcustodian, and in such cases the
Custodian has agreed that it will use commercially reasonable efforts promptly to transport the gold
from the subcustodian’s vault to the Custodian’s London vault, at the Custodian’s cost and risk. The
Custodian is a market maker, clearer and approved weigher under the rules of the LBMA.
The Custodian, as instructed by the Trustee, is authorized to accept, on behalf of the Trust, deposits of
gold in unallocated form. Acting on standing instructions given by the Trustee, the Custodian allocates
gold deposited in unallocated form with the Trust by selecting bars of gold bullion for deposit to the
Trust Allocated Account from unallocated bars which the Custodian holds or by instructing a
subcustodian to allocate bars from unallocated bars held by the subcustodian. All gold bullion
allocated to the Trust must conform to the rules, regulations, practices and customs of the LBMA.

http://www.spdrgoldshares.com/assets/file/stg/pdf/10k_Sept08.pdf

So it appears that the ETF does hold actual gold.

It appears that the ETF purchased nearly 5 million ounces of gold during the year. If the physical was, say, $100 higher than the spot price (just to make it easy), then the net deficit of the ETF would be $500 million. Perhaps that is being buried in the cash flow statement, but have you seen any evidence that the ETFs are buying physical gold at a much higher price than the quoted spot price?

 

[gonegolfin]

I did a quick search and couldn't find anything on EDGAR, but this is the description on Yahoo Finance.

GLD: Profile for SPDR GOLD SHARES - Yahoo! Finance

I always thought the ETFs held gold. That was one of the bullish cases to hold gold when they were created, that they would hold actual gold.

The ETFs are supposed to hold the physical metal, not engage in futures contracts. I have no doubt that they do hold metal. But I do have doubts about whether they have full backing for their outstanding issued shares. Much has been written about this (from several analysts) over the past couple of years. Many folks also claim that the custodians are using this metal to back short positions in the futures markets.

Regardless, I (as well as many others) do not consider it to be a physical metal investment if you cannot get your hands on it. That is, you have no option to take delivery. Also, and just as important, in the event of a custodial default, you are simply a creditor. The metal is not yours. This is not physical metal ownership. There is counter party risk, unlike real ownership. And by owning real physical metal, this does not mean that you need to hold the metal in your own possession. There are several good options available. GoldMoney.com is one.

Brian

 

[gonegolfin]

It appears that the ETF purchased nearly 5 million ounces of gold during the year. If the physical was, say, $100 higher than the spot price (just to make it easy), then the net deficit of the ETF would be $500 million. Perhaps that is being buried in the cash flow statement, but have you seen any evidence that the ETFs are buying physical gold at a much higher price than the quoted spot price?

No, the ETFs have been buying at the spot price (which for now, is determined by the futures market). Just the same as GoldMoney.com. However, these are the industrial or wholesale bars (For Silver, these are 1000 oz. bars. For Gold these are either 100 oz. bars or LBME bars ~400 oz.), which as I stated previously are the last to run in short supply. But according to some buyers of these bars, these are getting "sticky" (which dovetails with what is happening in the COMEX futures market).

The real shortage has been in retail Silver and Gold (bigger shortage in Silver) and is moving higher up the chain. And now we have the slight backwardation in futures and metal leaving the COMEX in large amounts.

Brian

 

[gonegolfin]

Let me see if I understand this correctly though: too much paper chasing too much gold, like a game of musical chairs? And the holders of physical gold don't want to be the ones left standing, even if that means giving up virtually guaranteed profits?

This would be true of a substantial permanent backwardation, yes.

Brian

 

[Toro]

I asked a friend of mine who collects gold and silver coins and follows the physical coins market. What he tells me is that the premium is primarily in the American Eagle coins. There is little if any shortage in the Canadian Maple Leaf coins, the Krugerrands, etc. Is this correct?

It seems that there is no shortage of Canadian Maple Leafs, which you can buy directly from the Canadian Mint.

Royal Canadian Mint - Gold Coins