Today's Market Observation  08.24.2009  Mon  Tue  Wed  Thu  Fri  Kirby Archive

Shell Game Revealed?

BY ROB KIRBY | august 24, 2009

Last week, on August 19, 2009, George Milling-Stanley, Managing Director and “mouthpiece” for the World Gold Council appeared on Canada’s Business Network [BNN] and, in response to questioning about the activities of precious metals ETFs by commentator Pat Bolland, Milling-Stanley stated [at 5:50 of the following]:

“ETFs don’t buy gold… people who buy ETFs are buying shares that are in issue and are backed by gold. If the broker-dealers who make a market in the shares of those exchange traded funds feel there is insufficient liquidity and not enough shares for them to buy on the stock exchanges “THEY” buy gold and deliver it to the trustees of the ETFs who create new shares so you can’t blame the ETF providers for anything which has happened”…

Milling-Stanley, when questioned about the dramatic rise in investment demand for precious metal, then went on to add,

“the advent of exchange traded funds which we [the World Gold Council] pioneered in Australia 6 years ago [that would presumably be 2003] brought a whole new universe of gold investors into the market.”

So, here it is – recorded on tape for posterity [http://watch.bnn.ca/trading-day/august-2009/trading-day-august-19-2009/#clip205231] – George Milling-Stanley, Managing Director of the World Gold Council, self professed “experts” on the world gold market; the world’s self proclaimed leading advocates for the promotion of gold – are apparently not aware that precious metals ETFs were IN FACT pioneered in Canada – and NOT in Australia as claimed – in a “closed-end-fund”, by Canada’s Spicer family as early as 1983:

 
Source:  ETF Connect - CEF Historical Facts

One can clearly see from the table above [see share price at discount to NAV] that in earlier years, prior to precious metals becoming “in vogue” preserves of purchasing power [prior to blatant and recognized money printing of the U.S. Treasury / Federal Reserve] closed-end mutual fund CEF share premiums used to customarily trade at discounts to NAV [Net Asset Value]. Take note of how this has changed today:

Source: Central Fund of Canada

The shift in premium being commanded in the marketplace by a verifiable, transparent, 3rd party audited precious metal ETF – shifting from a deep discount to steep premium is a CLEAR signal of how the market place values a static hoard of verifiable, 3rd party audited precious metal.

How the free market values an ever changing “pool” of precious metal in an open-end-fund format is, and ALWAYS HAS BEEN, best reflected by Canada’s Nick Barisheff’s Bullion Management Group’s – BMG Bullion Fund - launched in 2002.

Ladies and gentlemen, the two precious metals [bullion] ETFs cited above were pioneered in Canada without the [ahem] help of the World Gold Council. Interestingly, both of these funds have excellent and unambiguous levels of audit and transparency where custody of the physical bullion is concerned. On the other hand, the precious metal bullion ETFs with which the World Gold Council is associated have questionable and ambiguous statements regarding custody of metal right in their prospectuses, as James Turk so aptly points out;

“GLD presents its financial statement in 10-K reports filed with the Securities & Exchange Commission, and these are revealing. GLD's balance sheet states its major asset to be: “Investment in Gold”. It does not say just: “Gold”. This classification declaring GLD's asset to be an investment in gold rather than gold itself provides an easy hurdle to meet for auditing purposes.

Investments in gold can be nearly anything gold related, and for example, include gold certificates and other promises to pay gold. GLD does not have to prove to its auditor that each share in issue is backed by gold in the vault. Rather, all GLD has to do to satisfy its auditor is to simply show them an account statement (i.e., a piece of paper) from any subcustodian or sub-subcustodian that says gold is owed by them to GLD.”

The Bottom Line

Ladies and gentlemen, the World Gold Council represents itself to be the world’s foremost experts in and promoters of gold. Yet for years, against a growing backdrop of increasing global fiat money debasement and soaring investment demand, the World Gold Council [like a wolf in sheep’s clothing, perhaps?] has concentrated and emphasized the merits of gold ownership almost exclusively through jewelry. Demonstrating that they are ignorant or intentionally misguiding about the origins of precious metals ETFs is akin to professing to be a scholar of American History and not knowing that the War of Independence was fought against Great Britain, nor what century it was fought in.

I am personally ashamed that such deceitful hubris has been broadcast NATIONALLY, without retraction – from coast-to-coast in Canada.

The World Gold Council’s Conflicted Past

If you ask the World Gold Council or their “official numbers keeper” - GFMS – they’ll say there is no persistent gold supply deficit. If you ask the folks at GATA – they’ll claim there is an annual 1,000 – 1,500 tonne gold supply deficit.

So, apart from Milling-Stanley’s now documented lies about the origins of precious metals ETFs, who’s telling the truth about other matters?

What’s interesting to note in this regard, the World Gold Council and GFMS haven’t always shared the same view regarding gold supply / demand aggregates. Empirically their positions at times have been ambiguously at odds with each other and have lacked continuity. Here’s how GATA consultant Frank Veneroso explained the disparity back in 2005;

“... As I explained in the Gold Book, gold demand had been understated for years by GFMS, the ‘official’ keeper of the global gold statistics, as has been the flow of official sector gold. Official stocks were falling faster than the GFMS data would suggest. I presented abundant statistical information to make that case. We believe that the trend in the official data since then simply flies in the face of obvious facts and this discredits it further.

People ask us where we think supply and demand are now. Our standard response is that we don’t know, because the data available to us has become ever less reliable. In the old days, the World Gold Council produced a data series on gold demand for most (but not all) of the world. It was based on extensive survey data and it had no reason to be biased. It clearly showed a stronger trend in the growth of gold demand (excluding Western investment) than did the GFMS supply/demand statistics. For us it was an anchor that allowed us to see a growing error in the GFMS data (see the Gold Book).

In the 1990s GFMS was faced with a problem. From the late-1980s to the late-1990s, there was a growing flow of borrowed gold associated with speculative short sales, the hedging of central bank options and commercial inventory hedging, in addition to the well recognized producer forward selling. There were also some official sector liquidations that were not reported. These totaled to extremely large official supplies. For some strange reason GFMS refused to acknowledge most of these official supplies, particularly those associated with speculator short sales. This resulted in a gross understatement of annual supplies.

Unlike the World Gold Council, which tried to only come up with an estimate of demand, GFMS estimated both supply and demand. In the end GMS had to make their estimates of demand and supply balance. Because they were underestimating supplies to an increasing degree, they had to underestimate demand to an increasing degree to make these accounts balance. That is why the World Gold Council survey showed a stronger gold demand trend in the 1990s than the GFMS statistics.

Several years ago the World Gold Council decided to merge its statistical efforts with GFMS leaving us, in effect, with only the GFMS supply/demand estimates. It has been my opinion that the GFMS balances became so flawed by the end of the 1990s that they had become virtually worthless. Therefore, I’ve regarded the new World Gold Council/GFMS statistics in recent years as basically useless. We no longer have any anchor for estimating gold demand and supply...”

That Central Banks “swap” and “lease” gold is an undeniable matter of public record. The extent of this activity is not acknowledged by GFMS or the World Gold Council. We do know that it necessarily has been responsible for filling any and all recurring gold bullion supply deficits.

The bottom line is that Central Banks claim to “officially” have somewhere in the neighborhood of 30,000 metric tonnes of gold bullion in their vaults. However, the reality is that Central Banks possess LESS physical gold than they officially report – how much less is a matter of speculation and a closely guarded secret.

How can anyone take anything the World Gold Council says at face value?

Today’s Market

Overseas equity markets began the week on positive note with Japan’s Nikkei Index adding 342 points to 10,581. North American markets didn’t fare as well and ended the day mixed with the DOW ahead by 3.30 to 9,509.30, the NASDAQ falling 2.92 to 2,017.98 and the S & P off .60 to 1,022.55. NYMEX crude oil futures added .08 to close at 73.97 per barrel.

In the interest rate complex, the benchmark 5 yr. government bond finished the day at 2.48% while the 10 yr. bond ended the day at 3.48%.

On foreign exchange markets the U.S. Dollar Index gained .21 to 78.24.

Precious metals erased early gains with COMEX gold futures ending the day down 12.90 at 941.80 per ounce while COMEX silver futures fell .01 to 14.18 per ounce. The XAU Index gave up 1.14 to 146.23 while the HUI Index dropped 3.98 to 354.51.

On tap for tomorrow, at 9:00 a.m. June S & P Case-Shiller Home Price data is due – expected -17.0% vs. prior -17.06%. At 10:00 a.m. August Consumer Confidence data is due – expected 48.0 vs. prior 46.6.

Wishing you all successful investing and a pleasant evening!

Rob Kirby
Registered Representative

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Rob Kirby
Kirby Analytics Newsletter | Toronto, Ontario, Canada
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