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 ()


    El Gordo
    Feb 22, 2013 - 12:29pm

    Could it be a

    first? Almost.

    Feb 22, 2013 - 12:30pm

    I don't know what came over me ...

    I caught the fever.


    Feb 22, 2013 - 12:31pm

    Top 5 Wow Time to Feed The

    Top 5 Wow

    Time to Feed The Turd!

    Great work, keep it up

    Thanks for ALL the great info.


    Feb 22, 2013 - 12:34pm


    you are looking for rules and regulation to be adhered to where there are none. i can elaborate more later. ides of march will be interesting.

    Feb 22, 2013 - 12:35pm
    Feb 22, 2013 - 12:36pm


    5th and on a roll!

    Feb 22, 2013 - 12:39pm
    Mr. Fix
    Feb 22, 2013 - 12:42pm

    @ Groaner

    No bounce.

    Look out below.

    Feb 22, 2013 - 12:43pm

    Read it first…

    …assumed top ten had already been filled. Had I not dawdled I would have at least placed in the top ten.

    Edit: Guess I did place after all - I'll take eighth.

    And because I like it, here's a toon I posted in the last thread. I know a LOT of people stuck in this cube. Glad I bailed.

    Mr. Fix
    Feb 22, 2013 - 12:44pm

    @ Nana

    Only if your a banker.

    Feb 22, 2013 - 12:45pm
    Feb 22, 2013 - 12:48pm

    Geee, I Wonder

    If I sold a whole lot of some-things that I don't have, don't own and never did own, would that be legal?


    9th Amendment: The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

    Nick Elway
    Feb 22, 2013 - 12:55pm

    Point 3A GLD (and SLV) shares may be used to settle COMEX

    Since 2005 the CFTC rules have allowed settlement in "substantially the economic equivalent" , this link shows explicitly allowing the IAU ETF to be used as settlement for the gold contract.

    The ETF shares count as satisfying a COMEX delivery. If I was big enough and got a bucket's worth of GLD (or SLV) shares I'd trade them in for real bullion and that would reduce the ETF's holding. Not exactly sure how that fits in with your post, but it has to fit in somewhere.

    Feb 22, 2013 - 12:57pm

    Physical Gold > GLD

    Let's face it, GLD is great and all but physical gold cannot be beaten in the long run. There should be nobody in between you and your gold. Either way, all investors need to keep a close eye on the live gold price if they want to maximize profit and wealth preservation potential.

    Mr. Fix
    Feb 22, 2013 - 1:03pm


    In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people. Source – The Declaration of Independence

    Feb 22, 2013 - 1:03pm

    if we break $1500

    what would be our next level of support? thanks

    Feb 22, 2013 - 1:04pm


    Could be a real good move if silver does pop like many think it will. I already had some Jan14 $50 calls, so I bought 3 June13 $40 calls yesterday at $0.50. SLW right now is trading about $3.50 over spot silver. Last summer when silver was running up toward $35, SLW was trading at $8 over spot. I'm hoping!

    Feb 22, 2013 - 1:05pm

    I need a diagram

    Honestly, I've read the post a few times but cannot fully make sense of it. Some of the confusion is with terms like the AP and BB. Are they the same or different entities.

    I get the concept but am confused. I probably have just enough understanding of trading operations to be confused by what instruments are being used and between which parties.

    Feb 22, 2013 - 1:05pm

    Turd: Today post really fits

    Turd: Today post really fits into this news about shortage.

    Looks line in India they are really experiencing shortage of metal. According to sources, BB's have not fixed price for last 4-5 days for a big city dealer of order to the tune of 3 tons.

    At this time they have also not fixed prices for small town dealers for orders worth 100 Kg's.

    Looks like next week is going to be up and at the time they would fill the orders with confirmed prices which might be upwards of 1600.

    Feb 22, 2013 - 1:07pm
    ClinkinKY Mr. Fix
    Feb 22, 2013 - 1:13pm

    Maybe not a bounce...

    ...but there's always more to the ride. Unless you want to "jump off" right now:)

    @ Groaner

    Submitted by Mr. Fix on February 22, 2013 - 12:42pm.

    No bounce.

    Look out below.


    Feb 22, 2013 - 1:19pm
    Feb 22, 2013 - 1:26pm

    GoldMoney & Bullion Vault

    I queried GoldMoney about SovMan's warning (which seemed to me to be baseless, and an attempt to drum up business). Here's the GM reply:

    Dear Mr. Fastfoot, Thank you for your message and taking the time to express your concerns. We are aware of VIA MAT’s change of policy regarding individuals with potential US tax liabilities. However, please be advised that this does not impact whatsoever individuals who have an indirect relationship with VIA MAT through GoldMoney. For more information, see the following link. In the event of any changes to these circumstances, we would notify our customers accordingly. Kind regards, _ _ _ _ _ Yes, they acknowledge circumstances can change. But under the present rules, looks like there's no problem.
    The Vet Missiondweller
    Feb 22, 2013 - 1:29pm

    Missiondweller - terms like the AP and BB.

    AP = "Authorized Participant" = JPM (a company authorized to redeem and create GLD shares for physical gold) = someone allowed to screw around with GLD's allocated gold for their own profit while suppressing the price.

    BB = Bullion Bank = A JPM subsidiary or associate = A company that deals in bullion and arranges loans of gold (and paper representing gold) for Central Banks (CB) so that the actual physical metal the BB sells still shows in the CB books as an unencumbered asset thereby inflating the CB reserves.

    Urban Roman
    Feb 22, 2013 - 1:31pm

    Cue "The Procession of Trolls"

    To the tune of "Pink Elephants on Parade" from the Disney movie Dumbo.

    And now it's time for a music video

    linkman Missiondweller
    Feb 22, 2013 - 1:35pm

    @ Missiondweller

    AP= Authorized Participants (big banks)

    BB= Bullion Bank

    Hope that helps!

    Edit - OOOPS, a little late

    Feb 22, 2013 - 1:36pm

    Don't touch GLD with a 3 meter pole

    GLD really is a nice scam when you think it through.

    You create something that 1.) uses other people's money to 2.) buy physical they otherwise would have purchased to 3.) to use it as margin to sell in the futures to 4.) suppress the price.

    And in the end, the gold and the money are both stolen and GLD sells for .10, which is the price of all the chairs and office supplies.

    He who has the physical has the control, something that most of the paper world doesn't really understand about gold and other PMs - ownership (true ownership) IS control. They can't be separated out, like with the typical stock share.

    In any case, bitcoins are now at the $31 handle. Keep suppressing that gold, and reap the unintended consequences of your short term thinking.

    Feb 22, 2013 - 1:40pm

    Re: want vs. need

    There's no need to be a Luddite. You can buy old iPods and mp3 players for next to nothing on craigslist, same thing with cellphones too.

    I bought a perfectly servicable Roomba for $25, from someone who never used it.

    I'm not a jew, but I do subsccribe to the whole "never pay retail" ethos. :P

    Sheetrocker Nick Elway
    Feb 22, 2013 - 1:42pm

    @ Nick Elway GLD&SLV

    Thanks for posting that link. I mentioned in a post some time ago that these ETFs could be used to satisfy delivery but couldn't remember where I'd read it so I couldn't provide a link.

    I keep reading all these articles about standing for delivery and depleting the physical supply, but my understanding is that only a big player who can redeem a whole basket, can actually acquire physical if they want to play that game.

    For a relatively small player who can only stand for 1 or 2 contracts, if they want to hand you GLD or SLV, what can you do?

    Will someone more knowledgeable please correct me if I'm wrong.

    Lamenting Laverne
    Feb 22, 2013 - 1:48pm

    Excellent post!

    Aaaaand once again - I learned something new today ;-))) Great explanation!


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