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 22, 2013 - 4:43pm

    @Daveyboy . . .

    "sorry that you have chosen to worship a piece of metal"


    Most of us here like to fondle a piece of metal. In fact, I like to fondle more than "a piece of metal"--many, many pieces is better so I do not get tired of fondling the same old piece.

    Since you categorically KNOW that Turdites worship metal, please tell us what you worship, then.

    Island Guy
    Feb 22, 2013 - 4:46pm

    Deposit of Gold Into GLD

    Nick Elway makes a good point when he notes that:

    Since 2005 the CFTC rules have allowed settlement in "substantially the economic equivalent".

    Turd's analysis depends on the interpretation of GLD's rules as requiring a deposit of physical metal by an Authorized Participant to cover newly purchased shares. When no physical metal is deposited to cover the shares this tends to dampen demand in the physical market which would otherwise drive up prices.

    But what if a "substantially economic equivalent" to depositing physical metal is considered to be the mere purchase of a contract for future delivery of the metal. GLD could "stand for delivery" at that future time, and this contract for future delivery might be considered the same thing as receiving physical metal.

    The linchpin to Turd's argument about abuses in the GLD system turns on whether the Authorized Participants must deliver actual physical metal to cover the shares, or whether a contract for future deliver of the metal is considered the same thing.

    Of course, either way the Authorized Participants are manipulating the price of gold. However, one way is blatantly illegal and the other way is merely morally wrong.

    Feb 22, 2013 - 4:46pm

    Via Mat Dumping American Customers

    @NetRover2 thanks for the link to the ZH piece.

    As of April 30 Via Mat wants all it's US citizen customers, who store bullion with them, to get it out and gone from their vaults! They request a letter of disposal/disposition by no later than April 30th.

    If you store your bullion with Bullion Vault or one of the other lessor known depositories - don't think you are immune. Most of them use Via Mat for storage space.

    This is because of Uncle Sammy's new overseas tax regs, which come in at a little over 500 pages of regulations! Via Mat cites high administrative cost of dealing with American customers. So they want their bullion out and gone! Thanks Uncle Sammy!

    Feb 22, 2013 - 4:46pm


    It would be ok if the bullish CoT lead way to one or two more fact, I would invite it. The CoT is reversing and the big picutre is what counts. This switch is the move that HAS TO HAPPEN to spark the meteoric rise from a Cartel net neutral position. The more neutral them get, the tighter the squeeze on the Hedgies immediately following, AND then long buying ensues, perhaps on both sides. Deciphering the CoT, analyzing it and forecasting from it is great fun. This site provides the platform to do it because many here speak the same language.

    Its all good...March is right around the corner. I am getting a bit excited to be honest.


    Mr. Fix
    Feb 22, 2013 - 5:09pm
    Feb 22, 2013 - 5:12pm


    Ok...Maguire is a classic, thats for sure.

    In the written interview he made a startling comment (at least to me)

    He said...Gold/Silver are in a bubble....

    A SHORT bubble!!!!!!!!!!!

    Think about this. CNBS can always get a way with this bubble talk. They can simply claim they meant a Short Bubble...its all sooooo dumb!!!!!!!!!!!

    God, unreal. Really...


    Feb 22, 2013 - 5:15pm

    this site crashed for me twice now

    In 48hrs

    Also UK downgraded in it!

    Feb 22, 2013 - 5:27pm

    Holy Cow, TF!

    That COT is just jaw-dropping. Stunning. I am almost afraid to jinx it, this is such big news.

    I would very much like to put this out there, open for discussion by the board:

    1. Cartel covered 6,800 shorts by Tuesday close. They actually do hedge on behalf of clients (particularly producers) but the rumored level of shorts the bullion banks hold is around 30,000. Nobody really knows, but lets go with this number- that means they could have covered 22.3% of their shorts.

    2. But wait, there's more: the volume on the FOMC bs announcement Wednesday was around several times greater than the highest volume day we have seen in many months... possibly as much as 4 or 5 times greater. And NONE of this is yet reflected in the COT. It seems probable that a whole bunch of large and small specs were selling into this, yet everybody saw it- post-announcement, silver just sat there. It spun in place around 28.50 despite his truly massive volume- VERY, very likely that the cartel was taking their money and covering huge numbers of shorts into this. Maybe as much as they covered in the entire previous week. Maybe even more than that!

    3. So this is the biggie... could it really be possible that the Cartel just spun their position in such a short period of time? Could they have covered as much as 40 or even 50% (or more) of their short position- another 7 or 8 thousand contracts since Tuesday? Because once they start this process, they could conceivably "get out from under their huge short" in a stunningly short period of time.

    Maybe the Cartel just turned on a dime. Maybe they left the Specs holding the bag. Holy freaking cow.

    I Run Bartertown
    Feb 22, 2013 - 5:41pm

    Hippies scroll past...

    $159.50 - 323 left after mine .

    I know we have some Mosin Nagant fans here!

    And thanks TF, for the education!

    Al Huxley
    Feb 22, 2013 - 5:52pm

    re:Holy Cow, TF!

    Yeah, I totally agree with your observations.

    Been following the CoTs for a long time as I've learned that since the commercials own the Comex, things generally go their way. I've calculated the total Commercial short:long ratio using the weekly report published on Went back through old reports to early 2008, and found that the highest the ratio gets is around 3:1 - pretty much assured of a serious break in comex prices at that point. Can't recall the lowest I calculated, but definitely once you get into the 1:5:1 range, the setup is REALLY bullish. Ratio for as of Tuesday was 1.52:1 (373572/245536) - BEFORE the big meltdown on Wednesday.

    Add in the record low RSI (at least back to 2000), capitulation in the mining shares, bears out all over in the MSM and the comment boards explaining how foolish it is to be bullish on gold, in spite of better fundamental justification for it than ever, and in the face of increasing physical demand pretty much everywhere, and of course that really nice descending triangle on the longer-term chart - it's hard to imagine a more bullish setup.

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