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 23, 2013 - 10:30am

    The inflation cover-up continues to be exposed

    Horsemeat found in Italy beef products

    Horsemeat has been found in six tonnes of minced meat labelled as beef and 2,400 packs of lasagne bolognese seized from a company in northern Italy.

    The products were packaged by Italian group Primia, based in the town of San Giovanni in Persiceto, near Bologna.

    It is the first positive test in Italy since the scandal erupted last month.

    Earlier, the Italian authorities said they had found no traces of horsemeat in batches of beef products seized this week from the Swiss food giant, Nestle.

    The health ministry said the 26 tons of cooked and frozen mince beef meals would be returned.

    Feb 23, 2013 - 10:17am

    Trader Dan is a good guy. 

    Trader Dan is a good guy. You have to keep in mind his perspective which he mentions from time to time - i.e. he is a trader. He isnt married to a position and is equally comfortable going short as he is long. He follows momentum, pure and simple. Thats what traders do. While he is perfectly capable of taking the long view (and he has), his day to day is involved in the short term.

    When I first read his post on his blog - Turd is who came to mind in terms of who I thought he was referring to - but, its also possible he was referring to others (perhaps the folks over at KWN) which would be ironic since he is on there every week.

    I think the emotions that are driving Dan currently are more related to whats going on with our country, loss of freedom, slide towards totalitarianism/cronyism, debauchery of the currency, loss of morals in society, etc... Dan is a Christian and I have no doubt that what he sees pains him deeply (as it does me). It makes him angry (as it does me), frustrated because there isnt much that we can do...

    Not that Turd needs defending, but he has stated numerous times that he makes his "calls" mostly for fun and to provide ongoing content to keep a bunch of degenerate gamblers such as ourselves entertained while we wait for gold to cruise up and through $3500. I mean think about it - if he doesnt make new posts with his prognostications - wouldnt we quickly run out of stuff to yap about?

    There are 2 types of folks here (generalized). Stackers and traders. Some are very experienced and knowledgeable - others are fairly new to the game. Some are already well positioned in terms of preparations for what is coming - others are just getting started. Some are savvy traders - others are wide eyed optimists that go all in because someone posted something that agrees with their worldview (it must be was posted on the internet - right?).

    It is what it is. When you strip everything to its quintesssential essence - Turd is running a business here and its in his interest to generate pageviews, sponsors, etc... and there is NOTHING wrong with that - its called capitalism. He invests his time/effort/resources, etc... and from my perspective - he does a damn good job. Yeah - we can warn the newbies to do their due diligence and all that - but, when all is said and done - they will learn more from their mistakes than anything else so I dont really feel bad for anyone that makes a foolhardy decision based on something they read here (or anywhere else). Its called a learning curve. Lessons cost money.

    Feb 23, 2013 - 10:17am

    Harveys up...up and away...

    and going on vacation for two weeks with sporadic internet... enjoy vacation Harvey

    Second: I wouldn't be surprised if the BB (as Fix said) has entities available to HAND OFF the short's due to pressure from the regulator's and Dodd Frank...

    BTW the Elliot Wavers are looking at this as a final capitulation leg too... haven't heard from Avi at Seeking Alpha yet but we soon should...

    while Minyanville had a nice article on the the miners:

    being suspicious doesn't make you a TROLL...

    and Gold in particular:

    Feb 23, 2013 - 10:01am

    Ok, I admit it, it was me...

    I'm relentlessly calling for bottoms.

    Feb 23, 2013 - 10:01am
    Feb 23, 2013 - 9:58am

    Trader Dan

    I don't know who, if anyone, Dan had in mind. I wasn't suggesting he meant you specifically, Turd. But the general point is a good one. I thought you fought shy of calling a bottom - unless I missed it.

    Feb 23, 2013 - 9:52am


    I've noticed a trend with Trader Dans' comments lately. He's taken an "angry" tonality toward others. Implying (not directly saying) the others are 'stupid.' He's made several comments in recent blogs that says certain individuals are wrong. Ok, so be it they are wrong. But what does this all matter. It's almost as he's separating him self from the gold camp. It's now obvious that Trader Dan is not aligned with Santa in any which way or form.

    He's view seems myopic at this point and i understand he's a trader, and he has all but separated himself from the view of others regarding the market manipulation. Ok that's fine too. It's a free country right Dan. Everyone can express themselves as we live in a free country right Dan.

    I have no problem with him expressing his POV and his last statement, while may be true, ignores all that is in between what is happening in the market. I'm trying to solve what Dan's intentions are at this stage with his statements and blog. Maybe it's just he's vehicle to express his POV and how it differs with everyone else. A long time ago, in my business, i learned that when people overtly start coming out to say that "people in this camp are wrong" "people need to start thinking that..." it's because they are expressing an emotion within themselves-anger, fear or whatever. A leader..A true leader states his POV without trying to point out that the others are idiots-indirectly or directly. That's not to say that you can't point out the other POV, but when you ignore the other dynamics to this market and just blatantly implies all in the other camp are wrong then I don't have to listen anymore.

    If you think about it then, he's just essentially said Santa is a rat and his manipulation theory is BS...And that his call for the end near is BS. And that everything Santa has called for 1650$, $3500 is BS. So i wonder what santas pov is. I asked Santa why he belies we are going back up soon and he emailed me and said "54 years of experience"=translating into i've been in these markets, i've seen what occurs in these markets, i've participated in making these markets.

    No we are not Gods -no one is. No one has all the answers. But it's great that we are all allowed to have a POV and express it. Once that goes then our country goes down hill.. Right Dan? He knows' what im talking about because he belives that when people call him out on a perspective that you are the reason for the down fall of the country. And he emailed me that a couple of weeks ago. So let everyone be and say what they have to. It's all of our responsibility to manage how we deal with these markets. And yes, i have a little negative bias toward Trader Dan lately. But that's my right to express it since he is calling others stupid--it's implied not directly of course. People are subtle in how they approach their commentary. But if you peel back the onion and look deep inside you see what people are really saying.

    At the end of the day--keep the debates coming from all angles. We will know who's right and who's wrong. And yes, wise words from Trader Dan. But Wise to those that see them wise, and naive to those that see them naive, and what ever else you wish to see in his words.

    If santa is wrong in his call, what will Trader Dan say then?

    Feb 23, 2013 - 9:47am

    @ Motley Fool

    Can you Just Imagine though if that insignificant little 12 tonnes of Gold was in Our hands when all those paper promises realize their true value? Just like every scheme in history the fiat Ponzi will collapse, maybe not this year , maybe not next but it's day's will end as sure as night follows day it always has just never on this scale.

    Then us insignificant few will reap our reward, the pity of it all is that their are so few of us who actually get it. I mean if I can understand it and take measure's to protect my family with what seem's like quite simple to follow knowledge from like minded and helpful people, WTF is wrong with the world ? < (that last was a rhetorical question)

    Lamenting Laverne
    Feb 23, 2013 - 9:45am

    Remembering the Cease and Desist Order

    That_1_Guy posted the link below on the Cueball and Thunderlips thread.

    JPM was served with 2 Cease and Desist Orders, that requires them to improve their risk management across the entire bank and non-bank company structure. In the attachment, it states that the plans they have to submit must include the risk management of their synthetic credit portfolio and CIO office operations, but is not exclusively related to this.

    I don't know how significant this is, but submitting plans for the risk management part of the Order must be complied with within 60 days, which brings us to about 15th March. When the plans are approved by the Fed (no deadline stated for the approval process), JPM must adopt them within 10 days with immediate implementation and continual adherence thereafter.

    If it is true that JPMs activities in the metals markets are exposing them to significant unhedged or unreliably hedged risk, then I guess this Order could be quite important, because I guess that non-compliance with appropriate risk management procedures in a commercial bank and non-compliance with Anti Money Laundry procedures are in the category of stuff that can jeopardize banking licenses (e.g. the Vatican Bank regarding AML regulation). So maybe they are forced to retreat a bit on this account too.... Wishful thinking - I know ;-)

    I also remember that Turd had inserted a not-so-subtle reference to St. Patricks Day (17th March) in the video that was mocking the CFTC. Whether these two things are related remains to be seen, but I am so curious to find out what that meant, if anything.

    Anyway - the link is here:

    Feb 23, 2013 - 9:36am

    Dan Dan the Market Man

    "sort of perverse narcissistic addiction to constantly calling for bottoms"

    what on earth made you think that applied to you Turd?

    nice turn of phrase though.

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