GLD- Ahem...(This is probably somewhat of a repeat of the work done by James Turk when GLD first came out, but in light of present circumstances, and in light of the widespread proliferation of GLD and its "published" holdings of gold bars, I believe this information deserves another posting)
One more point to emphasize here, HSBC is the custodian of GLD. (I am using the S1 prospectus filed with the SEC on 11/16/04). If it is the case that GLD is leasing out the gold in GLD, and if HSBC were to go bust, the GLD Prospectus clearly states on page 13 that "gold held in the Trust's unallocated gold account and any Authorized Participant's unallocated gold will not be segregated from the Custodian's assets. If the Custodian becomes insolvent, its assets may not be adequate to satisfy a claim by the Trust or any Authorized Participant. In addition, in the event of the Custodian's insolvency, there may be a delay and costs in incurred indentifying the bullion held in the Trust's allocated gold account." The unallocated gold accounts are the accounts used to hold gold being deposited into the Trust, or being redeemed from the Trust. That is not "segregated" from the Custodian's assets means that bars of gold are not specifically identified at gold that belongs to the Trust vs. assets that belong to HSBC. The prospectus further states that in the event of insolvency by HSBC, the Trust becomes an unsecured creditor of HSBC with respect to unallocated gold. Leased gold would either be held in unallocated accounts moving in and out of the Trust, or the physical gold might not even be in the Trust, as subcustodians as described below, could lease out the gold and no one would know or would have the legal ability to find out.
As for the "allocated" gold - that which has been specifically identified as property of the Trust and held in a segregate account - in the case of HSBC going insolvent, the Trust can claim ownership of the properly allocated gold, but will be subject to the liquidator freezing access to ALL gold in ALL accounts held by the Custodian, including gold held in the Trust Allocated Account.
It gets worse. HSBC has the ability to appoint subcustodians to hold gold for the trust, and the subcustodians can appoint further subcustodians (page 12-13). From page 12:
Because neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians who may hold the Trust's gold, failure by the subcustodians to exercise due care in the safekeeping of the Trust's gold could result in a loss to the Trust.
Worse yet, the Prospectus states that there will be no written contractual agreements between subcustodians and the Custodian or the Trustee (page 11-12). AND the Trustee has no right to visit the premises of the subcustodian to inspect the gold or examine the subcustodians records.
Essentially, what all this says is that in the event of insolvency by HSBC, the shareholders of the Trust may in fact have no ability to capture ANY part of their investment in GLD shares. I have further work and analysis to do, but given what I have researched so far, I am quite stunned that anyone would invest money into GLD, as there are absolutely NO shareholder protections against the gold in GLD not being there, or for the shareholders to assert specific claims of ownership. Given that HSBC may be on the brink of insolvency as per Jessel's source, anyone who buys GLD thinking they are buying gold is risking losing everything - that is, being "Madoffed."
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