Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (22266)	11/22/2004 11:39:14 AM
From: ild	Read Replies (2) \| Respond to of 110194

Date: Mon Nov 22 2004 10:53 trotsky (Turk&GLD) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved Turk: "A product launched by the World Gold Council could have some competitive impact." that's right - but it's not just 'could have' - it HAS a competitive impact. Turk: "Even before starting the prospectus, I downloaded the 2-page fact sheet from click here ..., and there on the first line was an eye-opener laying out the essential nature of GLD: “Objective: Designed to track the price of gold”. Its objective is not to provide investors with the opportunity to own gold bullion by investing in the shares of an ETF. Rather, GLD is designed to track the price of gold. That objective is no different than what is accomplished by a gold futures contract or any of the dozens of numerous gold derivatives available these days. " he's close to fibbing here. the GLD ETF is not 'just' a tracking security, the physical gold backing it must be bought. iow, it IS materially different from gold futures and similar contractual trading. GLD is not a 'promise to deliver gold in the future' or anything similar. institutions that wish to issue shares in the ETF first MUST deposit the requisite amount of physical gold. furthermore, Turk neglects to mention throughout his diatribe that the gold deposited with GLD and similar funds overseas is so-called 'allocated' gold - iow, every single gold bar in those funds possession is identified by its number and exact fine weight ( good delivery bars vary in weight between about 380 - 420 oz. ) . allocated gold may not, per the rules, be lent out, moved, or otherwise be disposed of by a custodian. it MUST remain in the custodian's vault. there's absolutely no reason otoh to suspect the custodians and sub custodians who are members of the LBMA to resort to any kind of mischief. LBMA membership requires integrity and a solid financial background, and there are no historical examples of a member ever absconding with allocated gold ( as far as i'm aware ) . the real reason why the ETF must use sub custodians is COST. it just doesn't make sense ( as Turk himself admits somewhere in his article ) to move around hundreds of gold bars from A to B in London, when one can just as well move around the name tags in the vaults. to summarizet: 1. the ETF is not only 'tracking' the gold price - rather, this tracking function is an inherent feature of the fund. since it is not a closed end fund, premia and discounts to the spot gold price can be expected to be minimal , and in that sense it's a 'tracker' ( this is btw. a good, rather than a bad thing ) . but the shares on issue definitely ARE backed by bullion. 2. it would be nice to have it all stored in a single central vault, but it's impractical. 100ds of years of good business practices and hard-won reputations say that allocated gold stored at LBMA member firms is as safe as it gets. 3. the ETF's gold backing and ability cum willingness to deliver the gold upon redemption of ETF shares is a lot more trustworthy that every single government promise that has been made to the same effect in mankind's history. 4. Turk is mostly just worried about the 'competitive impact', i.e. the business he's going to lose to the ETF. 5. some investors prefer to buy bullion and put it in a safe deposit box, or bury it in the garden, other investors prefer their gold to sit with an LBMA accredited custodian while being able to trade quickly in and out of it in a highly liquid market. it is for this latter category of investors that the ETF is for. no-one forces anyone to buy shares in the ETF, it's all voluntary. 6. there can be no doubt that aggregate investment demand for gold has increased with the arrival of gold ETFs ( i.e., very little to no 'cannibalizing' of gold sales has taken place ) and that thus the ETFs have a positive effect on the market.