February 25, 2008 by david.pennington.

Many investors attempting to protect their assets with Gold and Silver have purchased shares in their respective ETF’s. They believe this is a wise and safe approach to indulging in the Precious Metals market because the shares tend to move in the same direction as the price of the metal, and it eliminates the need of addressing how to store the gold or silver if one took possession. However, there needs to be a greater awareness to the inherent dangers associated with these ETF’s. 

The first big point I want to make about these ETF’s is this. There are just as many dangers in owning the Gold ETF as owning stock in a gold mine. Both are represented by paper, subject to behind the scenes manipulation by the “Powers to Be”, and therefore subject to destruction. Just keep in your mind the phrase - PAPER BURNS, as opposed to the actual metal which does not. The ETF was developed and established by the “PTB”…that’s all you need to know to be suspicious. The PTB never give away anything without it being instrumental in their overall plans for us. In addition, keep in mind that when the collapse comes, it will take most if not all brokers with it. Many of these brokers today are close to collapse because they are involved in the sub prime loan mess. This includes large names like Merrill Lynch and small names like E-Trade. It wouldn’t take much for these companies to go under if their not already insolvent. YOU CANNOT TRUST ANY US FINANCIAL INSTITUTIONS. THESE ARE THE BAD GUYS. 

Specifically regarding the Gold ETF, something smells mighty fishy to me about what is going on in this ETF of late. Some of us have long believed that the inherent flaw in this ETF is in its auditing processwhich is less than transparent. If the bad guys who comprise COT and are the price managers on behalf of the US monetary authorities needed another source of gold for the supply that they feed into the market tosuppress the price, the ETF is a perfect vehicle for this. I find it a huge stretch of the imagination to see gold soaring into all time highs and the one major indicator of investment demand for that same metalsitting there unchanged when it comes to reported holdings for nearly two weeks! I just read this AM that platinum and palladium holdings in the London ETFs for those metals are soaring because of investment demand. Why then is the gold ETF not reporting a sharp increase in its holdings? To believe that nothing has changed in there is to believe that the sun rises in the West. 

As of the second week of February, the short position in GLD stock is around 8 million shares equivalent to around 24 tons of actual metal. 

That means that there are at least 8 million shares owned by longs which have no physical gold backing them in the vaults of the GLD custodian. This doesn’t include naked short positions which are never counted or declared. 

That the short position is increasing rapidly is not in doubt. It is the only logical explanation as to how the POG is increasing and GLD share trading is booming, but no actual metal is being added into theGLD custodian vaults. 

As the short position increases, each GLD share held is backed by much less than the quoted amount due to the share dilution effect of the shares sold short. If all GLD issued shares were legally sold short there would be twice as many shares in the market than there was physical gold backing them. 

It leads me to a curious conclusion. If for some reason a significant number of shareholders in GLD tried to bail out suddenly, it would be possible for the Authorized Participants (APs) collectively, to buyfrom the market, and attempt to redeem, more GLD shares than had been issued by GLD and for which there was backing of gold metal in the vault.. The first few to the wicket should get the full 1/10 per share, but the latecomers would be out of luck. 

My guess is in that event, the APs, seeing that they faced a huge loss would be forced to stop buying GLD stock and the share price would plummet to way below the spot gold equivalent price (quite quickly to zero) leaving the short sellers with massive profits, the APs with big losses, and all remaining long shareholders with valueless GLD stock! The classic “run on the bank” all done electronically and it could play out in a matter of minutes. 

It is a huge risk legally permitted and condoned by the SEC and the exchanges who allow unlimited short selling of these ETF products and all other stocks. In other stocks the damage can be just a severe, but with GLD, SLV or other materially backed ETF it would be immediately quantifiable and obvious the moment the GLD stock traded much below fair value when compared to spot metal prices. The trigger would be instant and the crash completed in seconds as soon as the market longs realized that all remaining GLD shares held in their accounts were worthless. Spot gold would almost certainly drop suddenly and then go back up strongly once everyone realized what had happened!

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February 11, 2008 by david.pennington.

This weekend the G7 consortium of rich countries announced they will sell off a portion of their gold supplies to better invest in other financial instruments yielding a higher return. Regardless of their stated intentions, the real reason behind this announcement is an attempt to drive down the price of gold. This is a strategy the G7 has used many times in the past when trying to cap the gold price rise. Their intent is to scare the market into thinking there will be a flood of new supply which will eventually drive prices much lower.While at times in the past this tactic has worked in the short term, it always fails in the long term because the underlying fundamentals behind the rise in the gold price is as strong today as it’s  ever been. Let’s examine some of specific factors why this strategy will fail once again:First, any sales of gold like this one has nothing to do with the market for gold, as not one ounce will ever see the free market. The buyers will be gold-poor central banks. Second, if you examine the history of IMF sales in the 70s is that all the sales did is allow huge buyers to enter the market at one price. That attracts the major buyers. Third, the following doesn’t mean a damn thing to the gold price trend. The only important fact is that the IMF just demonstrated its total lack of financial sense as it might only hold depreciating paper promises to pay nothing at all backed by nothing whatsoever. Fourth, the selling of gold like this only occurs in bull markets and has historically been useless to stop the price increase. In fact these sales helped the price of gold higher by facilitating demand from huge interest in the 70s and even more so now. So while the anti-gold crowd will attempt to exploit this announcement those nations with huge amounts of dollar reserves, like China, Japan, and the oil rich Mid-East will be high-fiving each other with a no-brainer plan to switch out of dollars and into gold. As a result this indicates to me the price of gold is not even half way to its upside resting point. This was true in the 70s. Finally those that control Black Gold also control Gold. Those that you feel have caused the problem and are anti gold are NOT. To know this you need only the eyes to see and the ability to connect the dots.This will be looked back at as great for the price of gold, as was the case in the 70s when the same entity, the IMF, proposed and did the same thing, only to stop before the buyers took all their gold. The same will happen if they even start.Note that the proposed sales come when the US Economic rescue plan is to occur. The reason is clear.

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