GLD Is Being Drained Of Its Gold

Investment Research Dynamics

It’s a matter of “trust.” How much do you trust GLD’s vault custodian, HSBC? Has HSBC given us any reason to place trust in both its financial reporting and the way it operates?  HSBC has been already been nailed for rigging LIBOR and the LBMA gold fix.

I wonder how many of those bars shown in the picture do not belong in the GLD segregated area but were moved there to give the illusion that the GLD account was filled with gold bars?

Another 9 tonnes of gold was removed from the GLD trust yesterday. This takes the “reported” amount down to 751 tonnes. The last time the reported amount of gold in the trust was at this level was November 18, 2008. The price of gold was $738.

Individual share selling of “odd lots” of GLD – where and “odd lot” is defined at as anything less than the 100,000 shares required to redeem gold from the Trust – does not trigger the removal of gold from GLD.  Poor investor sentiment does not trigger the removal.  The only way gold is removed is if one of the Approved Participant bullion banks collects 100,000 share baskets and turns them in exchange for the delivery of gold bars.   Once that gold is removed, it disappears.

On March 24 this year, GLD was reporting 821 tonnes.  Since then, 70 tonnes have been removed.  Most of it has been removed since late August.  It’ s no coincidence that the drain in gold from GLD happens to coincide with the strongest seasonal period of the year for Chinese and Indian gold buying.  Recent reports suggest that India imported 131 tonnes of gold in September.  This number would not include the large amount of gold being smuggled into India.    The Russian Central Bank released its gold holdings thru September, which showed it added 1.2 million ounces – or roughly 34 tonnes.  This was the largest monthly addition to its gold holdings ever reported.   And the most recent data from China show that, since returning from the observance of a national holiday, the Chinese demand for gold in the 2 days prior to the holiday shutdown and the 3 days after re-opening was over 66 tonnes.

With numbers like this being reported from the largest gold buying areas in the world, it’s hard to believe that the gold being removed from GLD is being used for any purpose other than to meet western bullion bank delivery requirements into these countries.

While it is clear that GLD is being drained in order for the bullion banks to avoid delivery default, it would be infinitely more interesting to know how much of the gold still sitting in JPM’s vault has paper claims attached to them.  That is, to what extent has this gold been hypothecated.  But because of the protections afforded the GLD Custodian by the investment prospectus, not even the GLD auditor can make unannounced visits to inspect HSBC’s files on this matter.

So, do you really trust HSBC and its custodianship of GLD gold?