Cage Match: Bron vs. Denver Dave
In one corner, from the former penal colony of Australia, we have Bron Suchecki of The Perth Mint. In the other corner, from the future penal colony of Colorado, we have Denver Dave from The Golden Truth website.
Judging by the level of response, both helpful and vitriolic, my pal Andy and I really kicked the proverbial hornet's nest when I released this post two weeks ago: http://www.tfmetalsreport.com/blog/4327/guest-post-price-suppression-mecanics-gld-and-slv-andrew-maguire. Managing through all of the clutter has been challenging but the differing opinions have been neatly summarized by two longtime readers of this site and I offer them to you in the space below.
First up, there's Bron Suchecki from The Perth Mint in Australia. Bron contends that there are several mistakes and faulty conclusions within Andy's piece. He's believes this so ardently that he took the time to write up a detailed piece, which he posted to the Perth Mint site as well as his own blog. To conserve space, I'm reprinting just the summary and conclusion below. You can read the entire piece by clicking here: http://www.perthmintbullion.com/Libraries/Website_Downloads/ETF_Price_Suppression.sflb.ashx
Price suppression mechanics was the focus of Andrew’s article. In terms of price suppression, I’ve demonstrated that the “borrow and sell” process can achieve this but the “long GLD, short unallocated” or “short GLD, long unallocated” processes do not.
Andrew also suggested the ETFs were being used as a source of physical metal when the bullion bank’s physical reserves ran low. Again, the “borrow and sell” process is the only one which can provide a bullion bank with a supply of physical.
I would also note that in terms of price suppression, the effect of “borrow and sell” on the gold price depends on the volume of gold borrowed versus the demand. It is entirely possible for the gold price to still rise in the face of “borrow and sell” transactions if the amount supplied was less than demand. The price may also just stay flat or it may fall. The effect of “borrow and sell” is suppression of a price that may have been (an exercise in counterfactual thinking), not necessarily resulting in a lower price. This can make manipulations hard to prove, particularly in conjunction with having to establish intent.
In any case, I am not sure the ETFs represent a significant source of physical or price suppression. ShortSqueeze.com reports a total of 22,060,800 GLD shares short as at November 28, which equates to approximately 2.2 million ounces. Compare this to the following:
1. The Societe Generale Gold Hedge Book Analysis Q2-2012 reports that the total mining company short position at 4.89 million ounces (probably a fair bit of this which is included in the COMEX figures).
2. The COMEX open interest is reported at 494,400 contracts, which equals 49,440,000 ounces. The Commerical net short position has averaged between 20 to 25 million ounces this year.
3. A recent Sprott article which concludes “that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets ...” Now I don’t entirely agree with the methodology or the conclusion (that is for another article), but for those readers who do, consider that 23,000 tonnes equals 739 million ounces.
Finally, the short interest in GLD is not entirely bullion banks but also includes speculators betting on a fall in the gold price along with some arbitrage (spread) trades. This is not unusual, as a look at many tickers on ShortSqueeze.com will show - indeed there is short interest in the Sprott Physical Gold and Silver Trusts (very low however).
The result is that the bullion bank’s share of the GLD short position is less than 2.2 million ounces, which in itself is close to irrelevant in relation to COMEX commercial shorts or the OTC London market (even if the actual amount of central bank gold leased is a fraction of Sprott’s figures).
My view, therefore, is that the relatively small size of the short position in GLD shares attributable to bullion banks is an indicator that bullion banks don’t use it as a serious source of borrowing for short selling price manipulations or physical supply, particularly considering that there is no material cost advantage to borrowing GLD versus borrowing gold from other OTC market participants or from central banks; and given GLD is an exchange listed product, borrowing transactions would be more visible than those in the OTC market, tipping one’s hand to other traders.
I would therefore suggest that if one is looking for price suppression mechanics, COMEX and the OTC London market is still where the action is.
Denver Dave did not see the same errors. In fact, he felt that Bron was all wrong on several of his points. Dave has not yet composed a missive as lengthy as Bron's but he did take the time to send along his own, personal conclusions, which I've reprinted below. More of Dave's work can be found at his site: http://truthingold.blogspot.com/
Mr. Suchecki has made some valid "corrections" regarding the general perception of those who question the legal integrity of GLD/SLV. But he stylistically uses pedantic nitpicking/correcting of Andrew McGuire's loose use of terminology as a device to try and diminish Andrew's comments. However, I would like to point to some issues with Mr. Suchecki's essay that are highly problematic. I preface this by stating that I have only read thru his write-up once and have not studied it. I may or may not take that project on.
1) Mr. Suchecki works for the Perth Mint - a gold custodian, among other functions. I would offer that this circumstance renders him biased toward the precious metals custodial operators and clearly he has to defend industry practices. That fact in and of itself imbues his commentary on GLD with prejudice. Other subtle problems with his arguments - and his unwillingness or perhaps lack of knowledge regarding those problems - reflect his obvious partiality.
2) He addresses the short-selling issue by explaining to us in very dry detail how the process of short-selling is supposed to work mechanically, in a perfect world. Not once did he address the issue of naked short-selling. I would like to remind Mr. Suchecki that several of the APs are owners of the DTCC and have been under fire for several years for corrupted management of the DTCC. That is a fact. Because of the insidious opacity with which the DTCC operates, there is no way to verify for sure to what extent GLD short-interest is naked or not. But I would bet him $10,000 that if I were to ask every single retail brokerage hold of GLD shares if they were the owner of those GLD shares, every single one would say yes.
In fact, as I think this through, the short-selling argument Mr. S tries to dispel with technical pedantry, in fact, would support the view that the AP/bullion bank is using short-sold shares to further implement the fractional bullion scheme, naked or not naked. If you think about it, the original buyer of GLD shares "thinks" he owns his shares. The short-seller then transfers those shares to a new buyer. So now you have two end-buyers who think that they own GLD shares. If there only two shareholders, one with 100,000 shares (minimum basket size for bullion redemption) who is going to be convert those shares to bullion and have it delivered, and a 2nd owner who bought the borrowed shares with the same intent. If they both converted at the same time, then legally, of course, the original buyer would not be entitled to the shares. His shares have been legally hypothecated. BUT, if this situation were allowed to stand without making both end-buyers of the GLD shares whole on their bullion, it would likely trigger a collapse of confidence in the brokerage business because no one in their right mind would ever buy stocks that could be hypothecated and re-sold. It would without equivocation cause the price of gold to go parabolic.
3) Mr. S addresses the audit issue, and I will have lot more to say about this if I decide to really delve into this thoroughly. BUT, if you read through how Inspectorate is retained by the Trust, they do a physical audit once per year. The second audit is more of a paperwork-check, spot-check reconciliation of the Trustee files with the custodial records. That leaves plenty of time during the year to play fractional "shell games" with the bullion that is supposed to be moving in and out of the custodial vault on a weekly basis.
This brings up another issue: the custodian/sub-custodian structure and the lack of legal glue in the legal wording used in the Prospectus to create a full-faith, binding, full-indemnification agreement between the custodian and the sub-custodians and between the custodian and the Trustee/Sponsor and, most important, between the unsophisticated GLD shareholder and the entire operation referred to as GLD. This issue is egregiously problematic and he conveniently ignores it. Mr. S' explanation for the AP/Custodian/Trustee relationship is a pathetic apology for a system which is exploiting both the unsophisticated retail investors who might otherwise buy physical bullion and mindless investment advisors who sell them GLD for commissions in generated in lieu of recommending the purchase of physical.
Finally, for all who have not read it, Alasdair Macleod wrote a piece last week in which he describes factually how GLD altered its prospectus in order to move regulatory oversight for custody of client assets from the FSA to the LBMA/BoE. This substantially degrades the legal integrity of GLD and SLV (SLV already had that provision). Keep in mind that the true integrity of the legal structure of both trusts has been legitimately questioned by many, starting with James Turk, from GLD's inception. If you read Macleod's article, you'll understand exactly why this change was of significance. http://gata.org/node/11965
Mr. S was stone silent on that matter.
So, there you have it. The judges at ringside have scored the first round a draw. Perhaps the two contestants will continue their battle in the comments section of this thread? Let's hope so.