Raiding the GLD

Fri, Feb 22, 2013 - 12:26pm

Time to broach this subject again.

Just yesterday, the GLD saw a withdrawal of 8.88 metric tonnes. This followed a drawdown of nearly 23 tonnes on Wednesday. In fact, since the start of 2013, the GLD is now down 59.61 metric tonnes or 4.42% of "inventory".

Hmmm. Now where has that gold gone?

  • Has it simply been returned to the Authorized Participants' vaults as investors reduce their exposure to precious metals?
  • Have GLD investors liquidated shares and taken delivery?
  • Or, as argued back in November, are the APs using the GLD as a store of gold that they can easily access anytime they struggle to find legitimate physical metal to deliver to clients demanding immediate allocation and delivery?
  • If the third bullet is true, then GLD drawdowns would be symptom of very strong, global physical demand.

    So, for your consideration, let's revisit this issue. First, here's a reprint of the points that Andrew Maguire made initially. The full link can be found here:


    The bullion banks finance their ‘physical inventory’ by leasing it or selling it to GLD and SLV shareholders/investors, then the bullion banks in turn use these ETF’s inventories as a ‘flywheel’ to both manage and leverage their physical reserves. For this walk-through, I will use GLD as an example. (One can substitute SLV for all that is described below relating to GLD except the basket sizes are smaller, constituting 50,000 shares).

    Baskets of GLD shares are bought and sold through a limited number of Authorised Participants. The authorised participants, (AP’s), are JPMorgan, Merrill Lynch, Morgan Stanley, Newedge (a joint venture between Société Générale and Credit Agricole CIB), RBC, Scotia Mocatta, UBS and Virtu Financial. This is how it is supposed to work. The size of each GLD basket comprises of 100,000 shares, each share representing just less than 1 troy oz. The AP’s, transfer ALLOCATED physical gold to the trustee who in turn creates the required number of new baskets of shares and then transfers these newly created shares back to the AP. To redeem the shares for physical gold or silver, the AP’s transfer any number of the baskets of 100,000 shares back to the trustee who then redeems these shares and transfers allocated gold back to the AP.

    This is all well and good on the face of it, but there are a number of ways this ‘allocated’ gold backing the shares in the ETF can be diluted /hypothecated in order for the bullion banks to ‘manage’ their physical reserves.

    If, as is often the case, there is insufficient allocated inventory available to the bullion bank at the current Comex driven & discounted spot fix price to create the necessary new GLD shares backed by allocated gold, then it is possible for a bullion bank to borrow short these GLD shares from the ETF instead of providing the required Allocated physical to the trustee to meet this obligation thereby ‘fly wheeling’ this physical demand in order to meet obligations elsewhere, likely at the day’s gold fix. This obviously has the effect of manipulating price lower vs. the true immediate supply demand fundamentals as no allocated physical metal has to be bought on the open market at that days fix to meet this new share demand as should be the case.

    This is now the point where transparency evaporates. The AP claims to be Short GLD while concurrently claiming to be backing it with an equal size long ‘UNALLOCATED’ spot gold position. However, LBMA unallocated gold accounts are run upon a fractional reserve requirement and leveraged around 100/1 so there is very little need to back this transaction with any real physical at this point; this is left until later as explained below. To unwind this short GLD position, the bullion bank has to ALLOCATE the required amount of unallocated gold and then transfer this gold back to the trustee thereby receiving back the required # of shares in order to repay the original GLD shares sold short.

    However, in conjunction with concurrent concentrated short futures positions, the sole object of this entire charade is to assist in depressing the price of gold at times of strong physical demand so that the futures price can be capped, usually at key inflection points where the price would break out and also swamp the very large concentrated Comex short positions. If this were not the case, the bullion bank would simply bid up that days fix price until it reflected that days true supply demand price levels for that fix and provide allocated gold to meet this real demand at that higher price.

    The resulting distortion now created between the real and paper market price is exacerbated through the use of heavy position concentration and leverage in the futures and derivatives markets, where these very same bullion banks then seek to profitably repay the shorted GLD shares at a lower price at the point at or below where the lines cross profitably. This then puts these bullion banks in a position to finally spot index UNALLOCATED gold against this naked short position only then moving to buy the now discounted unallocated gold into the Comex contrived dips. These discounted unallocated long spot index positions are then ALLOCATED at the upcoming fix, enabling both the repayment of the GLD short position at a profit but most importantly controlling the rise in price against much larger derivative positions elsewhere.

    Conversely, as evidenced by the steady 12-year stair step rise in prices easily observed in the daily and weekly charts, despite this many-year capping, we have also seen an ever larger and untenable LBMA unallocated short positions grow to what I now consider to be extreme danger levels. The reason is as follows: When the Bullion bank needs to make good on the unplanned/unanticipated CB and sovereign physical allocations at the fixes, they have regularly achieved this by going long GLD vs. short/selling UNALLOCATED gold. They then immediately turn around and transfer the required number of baskets of GLD shares to the trustee and receive ALLOCATED gold in return. Instead of settling/covering the short UNALLOCATED leg with this ALLOCATED gold, they are forced to satisfy these CB and Sovereign allocations by providing them this metal instead. The longer term price charts reveal this stair step higher, whereas we see no reduction, in fact from 2008 an increase, in the naked short Comex, (and unallocated OTC), bullion bank positions.

    I hope this has been helpful in providing an insight into the internal dynamics of the ETFs and how the bullion banks continue to operate in the shadows.

    Quite a few folks found this explanation a little too technical and slightly confusing. To help the cause, a few days later I took a stab at deciphering Andy's message:


    Finally today, please allow me to take a stab at explaining in greater detail the "Guest Post" from Andrew Maguire. I posted it on Wednesday as we were leaving for Thanksgiving and I can see now where it caused some confusion. As you know, one of my favorite techniques for explanations is the chronological layout so let's give that a try. Additionally, I think I'm laying this out accurately. This is how I understand it. I'll check with Andy on Monday to ensure that this is at least close to being accurate. If it's not, I'll post some additional clarification then.

    1. The "Authorized Participants" have a special relationship with the fund whereby they issue metal, 100,000 ounces at a time, to the fund in exchange for 100,000 share blocks.
    2. This should function as a two-way street where the AP can get its metal back by redeeming shares and the AP can also supply additional metal in exchange for additional shares. THIS, HOWEVER, IS WHERE THE TRICKERY AND MANIPULATION BEGINS.
    3. On big UP days in paper price, there is often a big physical demand in London and a big demand for additional shares in GLD.
    4. This is a double whammy of demand. The Bullion Bank (and Authorized Participant) should have to not only supply metal at the London allocation but this same BB/AP might also have to deliver metal to GLD to cover all of the newly-issued shares.
    5. I think you can see where that's a lot of metal and, in an environment of limited inventories, rapid BB/AP supply depletion would lead to shortages and even higher prices.
    6. So, here's the trick they employ to manage the situation, even doing so at a profit: The GLD delivers the gold back to the AP without the AP actually redeeming their shares. The AP is considered to be "short" the shares, instead.
    7. These shorted shares provide the "offer" against the investment world "bid" for GLD shares that day on the NYSE. Since no new shares are needed to be created that day, no new demand for physical deposit is created, either.
    8. On the other side of this trade, GLD delivers metal to the AP as if it had redeemed the shares, though. The AP uses this metal to settle the physical allocations for that day.
    9. So, where there should have been two, separate demands for physical, the demand was met by short-selling GLD and then using this GLD metal to meet allocations in London.
    10. The effect is then chronicled by Harvey and others as "gold went up $20 but, mysteriously, GLD shed 2.72 tonnes".
    11. Here, then, is how they reverse these "trades" and return everything to where they were. The BB/AP that is short the metal to the GLD needs to put it back in at some point. The next time a paper price raid is effected on the Comex, the AP itself takes delivery of some metal in London.
    12. This metal is then returned to the GLD in exchange for a "covering" of it's short position.
    13. This, typically, takes place on a DOWN day where Harvey et al notice that "though gold declined $15, the GLD added 2.72 tonnes of metal today. Go figure."

    Anyway, I hope this helps explain the process. Again, the Bullion Bank that is also an AP of the GLD can "flywheel" metal into and out of the GLD and/or SLV anytime they need to in order to meet physical demand elsewhere. In the process, the BB/AP conveniently provides liquidity for GLD/SLV share demand, which negates additional GLD purchasing which would have otherwise been necessary. It's a true WIN-WIN-WIN for the BB/AP as they are able to cap and control price while appearing to have no problem meeting London demand and then they turn around and cover all the positions at a profit on the next bout of price weakness.

    Again, THIS IS NOT SUPPOSED TO BE HOW IT WORKS. The banks are supposed to supply metal to both the GLD and the London buyers. There is not, however, sufficient supply to make this happen at the current price levels. So, instead of allowing price to rise to the natural equilibrium of buying and selling interest, the BB/AP uses the tricks outlined in Andy's guest post to manage and cap the situation. On the bright side, THIS CANNOT CONTINUE FOREVER and, WHEN it fails, the reset in price will be spectacular to behold.


    By the time the next week rolled around, there was an active discussion on the internet regarding the accuracy of this analysis. (No doubt this post will reinitiate the "discussion" and bring out many of the same commentators.) Here's a link to the follow-up discussion, posted a few days later. Before you form an opinion on the matter, you'll definitely want to read both sides of the issue:

    So there you have it. All of this should all make a very interesting reading assignment for you as we wait for today's GLD numbers. Could there be another huge drawdown? If so, what does it mean? Does it even matter? I look forward to reading your comments.


    p.s. Andy just recorded this morning another interview with KWN. Be sure to check that site later today for the full interview.

    About the Author

    turd [at] tfmetalsreport [dot] com ()


    Feb 24, 2013 - 9:07pm

    @The Vet Re GLD Physical depletion

    Thanks for the response and I understand your point. However, Shorting would NOT actually have any impact on the Number of Shares outstanding and so, by extension, the amount of Physical held by GLD. Shorting borrowed shares is perfectly normal and legal. NAKED shorting of shares WOULD cause distortions. However, GLD is listed on The NYSE where Naked shorting is illegal. Yes, I know.....

    Perhaps it's just a game of "Pick your "Regulator""? Porn watchers at The SEC or "Our Investigation is ongoing (For FIVE years)" at The CFTC?

    Feb 24, 2013 - 9:21pm

    Trader Dan

    He is a good TA guy. No doubt there. Problem is most can draw lines, and many do, with lots and lots of charts. GLD and SLV are too spooky for me, I want my metal in my possession, phsyical only, watch the charts for a low-risk trading opportunity. Deliveries, COT, GLD, SLV, comex, it to me is all a bunch of manipulated rubbish.

    Dan always gives the, IF THE BEAR PUSH, this is the next support, or if the bulls push, this is the next resistance level. Isnt that just great. May be good for newbs, but rather repetitive to some vets in the metals.

    Just straight TA with some COT reporting ..... like many. COT can get blown out either way, and in a GET STUPID major 3, COT and RSI can be rendered absolutely meaningless, which is really where we all want to go, so I dont focus on COT stuff, because man its too spooky for me, cant believe any of it really. Go to Gold Eagle, they got all kinds of guys with the same stuff every where, but it aint sinking in to middle america, not yet any ways, these writers simply dont speak americano.

    Yolanda Be Cool & DCUP - We No Speak Americano (Official Video)
    Texas Sandman
    Feb 24, 2013 - 9:41pm

    What I look for...

    We are at the bottom of a declining wedge, which is a bullish price pattern (expect bullish resolution --- breakout through the top of the wedge). At the same time, we have a potential bullish MACD divergence lining up. IF the bears press, we would go down to the bottom of the channel & invalidate the wedge. As it is, if we do rally, we could do like we've done in past rallies & go a fibonacci retrace (24% or 38% most likely) off this low & then crash back down for a retest. That's sort of what I expect & why you see fibonacci levels marked out on this chart. If you do get long, I'd certainly have those levels in mind here. You could scrape a bit long & then reposition. IF something like that does happen here, we'd most likely see a higher MACD low setting up a BUY in the longer term model I watch.

    But given the bulk of the technical evidence, a crash through the bottom of the wedge is not the most likely outcome here. To confirm a bullish outcome, the MACD needs to turn higher right here. Note the following chart is updating MACD within the bar, so we won't know that's the outcome until close of day (could repaint).

    Again, this is going further out on a limb than Trader Dan is willing to go. And if Trader Dan wants to rail against me for "bottom picking", so be it. As it is, what he says is so bland as to be completely useless. So take that Trader Dan!!!

    Feb 24, 2013 - 9:47pm

    Auric says hello (Goldfinger sung by Shirley Bassey from 1968)

    Only golddddd....he luvssss gollddddd!!!!!!

    Shirley Bassey - GOLDFINGER / Typically English (1967 TV Special)
    Feb 24, 2013 - 9:51pm

    Doesn't this look like a chart...

    ...that's getting ready to go vertical? Santa's prediction of a monetary reset in 2015 or 2016 would be consistent with that outcome.

    Texas Sandman SilverLeaf
    Feb 24, 2013 - 9:51pm


    To me, it looks like the reason a silver quarter STILL buys a gallon of gas.

    Cobalt Silver
    Feb 24, 2013 - 10:06pm

    Maguire on KWN

    If I got it right,

    Soros did not dump his GLD. I fact he may be standing for delivery.

    Shorts have been unloaded on momo traders.

    Physical and paper are now diverging.

    Expect volatility as the giants fight for survival.

    Rumors of another trading institution going down.

    HEH or it could all mean nothing. I dunno but my gut tells me discount prices are ending.

    What we KNoW. The UK downgraded one notch on Friday. The GBP and the Yen are sinking like a stone. Flight to safety in the US$ will follow moderating PM prices in North America. To me near record OI means inside info being passed around amongst traders. Expect margin hikes, enforcement agencies to ride shotgun protecting the Fed Club members and official efforts to let the dust settle.

    Feb 24, 2013 - 11:14pm
    Feb 24, 2013 - 11:38pm


    right there on the corner, crenshaw and sepulveda, LA, but no gun were fired, but it was definitely a war, Flying-A Phillips going at it, in about 1964, pop bought a gallon of gas for 1 silver dime. IT WAS A GAS WAR!!!!!!!

    when when when will THE GAS WARS of the 60s come back?????

    maybe when a dime is no longer a counterfit fraud, I suppose.

    There are not many of us left, we are dying out slowly, those who actually used real bullion coinage in commerce, on a daily basis. 2 generations are without that anchor. They only know FED speak and paper trash that is the con. Yes, joe six-pack will get in, during major 3, but they wont do because they understand history or the anchor that is gold, they will only know that metal is rising respective paper in the throw of gut renching inflation. They wont really know why bullion is key, (limited supply, money), but they will understand inflation, and will understand a rapidly rising bullion price, and then, and only then, will they jump in, and destroy the shorts. They wont do it for their own FREEDOM. They wont do it because the want the government limited to sound money, balanced budgets. They wont do it for the fundamentals. They will jump on the band wagon, because it makes MORE PAPER keeping up with inflation as their pathetic reason for holding the real stuff. There will be no sense of righting the ship of state, to confine the judges and politician with their enslaving taxes, fiat, and hand outs. They will do it simply for greed, and in the end, if that is all it is, it is a very pathetic reflection of Americana, and that will be their private war, nothing but greed greed greed, while getting devoured by taxes, inflation, hand outs, in a war


    War - Edwin Starr
    The Vet philipat
    Feb 25, 2013 - 1:20am

    philipat - technically you are correct when you say...

    "Shorting would NOT actually have any impact on the Number of Shares outstanding"

    What it does do is increase the number of shares being traded and the number held by investors who believe that they are long. It does not affect the number of shares issued but it does increase the number of shares held long, and every long shareholder believes that he can redeem all of his shares for metal, when that isn't true. There are over 20 million GLD shares sold short right now, so there are a lot of long shareholders who believe that their shares could be redeemed for gold from the gold vaults when in fact if all longs presented their shares tomorrow for redemption for gold the vault would be at least 65 tonnes shy.

    The last 20 million shares presented for redemption would be turned away as there is no gold left to redeem.

    What would those 20 million shares be worth with zero gold backing? My best guess is almost nothing!

    So how much would it cost for the short sellers to cover those worthless shares and get them off their books? Again, almost nothing!

    So the short sellers (who borrowed shares and sold short quite legally) make a windfall and the long holders of the stock that they bought because they thought that each share was backed with 1/10 oz of real gold are ripped off, all according to the exchange rules. No law has been broken!


    Just for the exercise accept that there are only 1000 shares issued in total and that's covered by 100 ounces of gold in GLD's custodian's vault.

    Clearly if those 1000 shares were all held in one margin account and the broker for that account (without informing the owner) lent them to a short seller who sold them to another legitimate long shareholder, then we have two shareholders who both believe they own the same 1000 shares when in fact there is only sufficient gold in the vault to cover one of their holdings. Now if the second buyer redeems the 1000 shares he just bought. GLD would cancel the shares and give him the last 100 oz out of the vault.

    There is nothing left to cover the unlucky first owner whose shares were borrowed and sold short. He THINKS he STILL owns 1000 shares backed by gold, but all he really owns is a court case against the borrower. There is no gold in the vault to redeem! So his 1000 physical "gold backed" shares are now backed only by a risky court case and not by even a glimmer of real gold.

    Feb 25, 2013 - 2:58am

    @The Vet

    Yes, BUT the price of a share in GLD only ever represented to represent 1/10th of an ounce of Gold didn;t it? You seem to be suggesting that there is some sort of "Con" because GLD only represents 1/10th of the price of an Oz of Gold, which is just not correct.

    Even if GLD did technically run out of Gold at, say, USD 3K per Oz, I would be happy to accept The Fiat, which I could then re-invest in whatever, including Physical Gold. I await to be convinced in the case that GLD is a Con but am more than prepared to listen to all reasoned contra-views.

    Actually, my original question regarding the depletion of Gold in GLD still stands. And actually, I am surprised that there have been no convincing answers yet. And, actually, all I am trying to do here is learn.

    Feb 25, 2013 - 6:04am

    Wait a minute, I recognise

    Wait a minute, I recognise this feeling, if history repeats then this is what happens:

    1. I hold off getting in further on the long side for fear that the ag $24 etc callers are right.

    2. Watch things take off smoothly and (what seem like forever but only actually weeks) doesn't dip significantly to buy in further.

    3. Finally my resolve breaks and I buy in on no real dip when it looks like it's going to take off again (and never stop going!!)

    4. Turns right around and takes me and the other mugs buying at short term tops to the cleaners.

    (Note to oneself - as per usual ain't got the depth of account to rectify 1 so just avoid 3 if 1 and 2 does unfold...)

    And Turd, I don't think Dan meant you - my impression/recollection of your analysis is that you rarely even attempt to call bottoms so would be a harsh exaggeration to describe as 'incessantly'.

    Feb 25, 2013 - 8:04am

    I have been thinking again-

    I have been thinking again- as I have taken a pause in day trading because these two things were incompatible- and this is the outcome-just had to spell it out.The further it gets, the more understanding is needed to add something...

    My short term view ( until the USG for whatever reason ignites FISCAL spending- I believe during or after summer 2013) is:

    Given the new and historically unique monetary paradigm the USA has been operating on (USG treasury or debt based world monetary system) , its understanding is not complete in many circles, or its cynical nature is hidden behind some murky theories instead of telling it like it is ( e.g. M.Hudson - Super imperialism- beautiful and spot on, blank language). So, returning to the monetary side of USD, any signs of improved USG ability to tax people despite the fact that deficit is large and debt is still growing will be interpreted as strength for the system , and correspondingly , must coincide with new lows in gold/silver prices. Again, despite the debt, whose buildup has slowed, the focus should shift to the basis- the ability of the USG to enforce tax payments in USD and use them to fix deficit, i.e. reduce annual deficits-NOT eliminate- as the USG debt as total does not matter much in this system- its the doubts about the system the debt increases generate that matter. That was done when tax part of fiscal cliff was increased, so that taxes are higher now. If now, with sequester, also the yearly deficit is cut, the reaction should be that trust in USG system increases and gold drops.

    In short, as long as investors feel the USG and FED together has some degree of control over the USG debt based monetary system, which they seemed to be losing since 2001 - and even more so in 2010 - now when the time has passed things does not look so immediately dire anymore. The fact that FED has been saying there will be no inflation and there has not been in real things- but has been in financial assets- which FED also promised ( wealth effect) has given some credibility back to the FEDs ability to control things after wading into new experimental tool usage, and that means that when FED is talking now of exit, reduction of monetization and possible rate increase- it is also taken with more seriousness than earlier -because the waters being navigated ( One country debt based world monetary system) is totally new in the history of mankind. That gives FED some bit more assertiveness and, since QE itself has failed since QE3 to raise gold prices- all this gives bearish outlook to PMs.

    As I mentioned in the beginning, that is medium term prognosis as sooner or later fiscal spending will be forced to be released, and that is the real inflation threat as opposed to QE-and also the real recovery tool that ONLY the USG can utilize. Its unique situation and i have little doubt that once the FED and USG feels they can control things, they will do something more for economy (read employment) than until now as 2014 elections come closer. Congress will SPEND (dems) or cut taxes (REPs) , or both (Both) . But not now. They have to be sure they can charge the rest of the world and still maintain the image of being in control of the situation in front of the USA voter and international finance. And for that, they need bit more time and theories/propaganda that support it.

    Looking at the political side of this, once started, they will have to spend /cut taxes until 2016 elections. Only after that there can be some attempts to reduce money supply.

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