So... You Want to Sell Your Gold Stocks and Buy the Gold and Silver ETF's? (Part 2)

By: Richard Greene | Wed, Jun 4, 2008
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Ever since the Berlin Wall came down back in 1989 we have seen the very things we protested against so vigorously with regards to Russia come to pass in the U.S. without so much as a peep. If we do not now have a centrally planned economy and stock market then I do not know what else you would call it. Our Central Bank decides what interest rate level and how much money production is just right for the economy. We even have a Working Group on Financial Markets to tame any market response that does not reflect the intentions of all of the Central Planning. Somehow they are allowed to expand these non-market related powers which in turn continue to move the system to one that is more and more centrally planned. Finally, we have arrived to the point where it apparently is okay for the Fed to print money from thin air, (which only translates a portion of the purchasing power of all of the people's money into the pocket of JP Morgan), so that JP Morgan can turn around and purchase Bear Stearns and in effect stick us with the tab. This signal event was the all clear signal for us to back up the truck and buy all the physical gold and silver you possibly can for protection from this type of thievery. They are flat out telling you that your money is theirs and they will take it and use it whenever and for whatever purpose they choose without your agreement. On top of that the mainstream commentary drones on how the $130 oil is going to cause inflation while, in reality, it is the inflation from the example above that has caused the $130 oil. These so called experts are in fact financial illiterates. Even more pathetic is the fact that Congress is trying to figure out what to do about speculators since they are buying commodities, driving their prices up which they believe is the cause of inflation. These are not highly trained economists if they believe that knocking the price of commodities down will not result in even higher demand and eventually even higher prices. It never occurs to them that the centrally planned economy has set interest rates in the neighborhood of 10% below inflation which amounts to paying buyers to spend money on real things which can not be expanded at a mere whim like today's money from air. It has gotten so bad that even the clueless reporters on CNBC are making fun of the government's inflation releases. The activity in commodities is not speculative; it is totally rational as people exchange increasingly worthless scrip for items which take tremendous work and inputs to produce.

There has been much commentary about the huge short interest in gold and silver markets and how it is not manipulative but as Jason Hommell and Ted Butler intelligently point out there are limits on the buy side yet no limits on concentration and size on the short side. The latest explanation I have seen ridiculing the manipulation crowd explains away any manipulation by showing us how the short interest is totally rational due to the yen carry trade. This guy just doesn't get that the entire yen carry trade is one big manipulation as that financing would never be available in a true free market. The availability of yen at such low rates is due to, again, a centrally planned and pegged exchange rate system. This is the very reason that physical gold and silver is the only true defense from this centrally planned rigging. Gold and silver is outside this system and there are limited quantities available. Now that the world is slowly but increasingly in large numbers waking up to the fact that money is being diluted in their pockets they will seek out a defense and gold and silver answer that need. I contend that the Gold and Silver ETFs were created to hasten this process. In effect, the ETFs are an attempt, (and one that has been more than mildly successful), to "fiat"-ize gold and silver. I am amazed how readily acceptable that these instruments have become to the gold community which should know better, particularly in light of the firms that are responsible for bringing these options to the public; the banks and money powers that are the biggest enemies of true money which endangers their very existence. On this point it has gotten so bad that some of the leading advisers in gold and silver feel these are totally fine alternatives. There is one gold stock adviser and newsletter writer whom I have the highest regards for as far as analysis and stock picking ability that has always had a top ten list of gold stocks through all types of gold markets bull and bear. Several months ago he dropped his top ten to six and recommended putting the remaining 40% in the Gold ETF. His reasoning was that he liked it better than cash. It is only one step away from cash; a promise of gold rather than a promise of nothing. I am glad to see he has since, and in very short order, brought his top ten back to eight and this week it is going back to a top ten. Maybe he thought better of the possibility that the ETFs are empty promises. At any rate, I for one rate the ETFs as far, far more risky than gold or silver stocks and the reason is I believe the ETFs are a total fraud.

In the first part of this article, I explained why I believe the ETF is a fraud and even if it weren't it could not possibly function as presented. I believe a third grader could understand the logic yet I received around ten letters explaining to me that the ETF represented 98.5% of the gold that is (supposed to be) there due to the management and handling fees as outlined in the original prospectus. Well at least it's good to see that some other people have read the prospectus so they are at least trying to understand what they own. The major point that I was trying to make and that many did not comprehend is that the Gold and Silver ETFs are many times their original size so they have had to constantly buy more gold and silver to back the shares with actual metal. There is no economic way for them to do that with the Gold ETF trading at a constant discount to spot gold, gold futures and physical gold. As an example, right now with spot gold at $885.90, gold futures at $887.90, and physical gold at $917, how do you take shares of GLD at $87.45 which equates to $874.50 and buy physical gold when new shares are issued. There is not even enough to buy the gold never mind shipping it, storing it, guarding it, or insuring it. Even if gold is being purchased the shares reflect less and less gold every day and the shares should trade at a bigger and bigger discount which going forward allows buying less and less gold. In addition, the rules of the ETF make it a possibility that the gold can be swept away by big redeemers. It is very unlikely that big institutional investors such as Calpers, for example, would sell and take delivery of actual gold or silver since they very likely have nowhere set up to actually store it. Small investors are priced out of the market for redeeming since you can only actually redeem a minimum of 10,000 ounces which is almost $10 million. So who does that leave that would take possession? When the bullion banks and the money powers are no longer successful in capping the gold price through their various means including the GLD and SLV ETFs, they can quite easily purchase huge positions even if it causes the gold price to go up $100's of dollars in one day. Since the banks get first dibs on new money which materializes from thin air at the whim of the Fed, it would not matter what price they pay for the shares. Then they could sell the next day by redeeming and take possession of all the gold they have been herding into the ETFs over the past several years. The ETFs could see the majority of their physical backing pulled right out from under them without any warning. This may seem far-fetched to some yet it remains a very big risk to the holders of GLD and SLV now that the physical metal markets are so tight. In addition, by buying the gold and silver ETFs you are handing the suppressors of gold and silver a pool of metal so they can be used to lease or sell gold during critical periods to delay the metals from reaching true market levels. I believe that if only 10% of the holders of GLD and SLV sold their shares and put the proceeds into physical metal in their own possession immediately, the price of gold and silver would skyrocket. There is no better sign that this would happen than the fact that the latest takedown in silver from above $21 an ounce to the $16 range directly after the Working Group on Financial Markets meeting on March 17th resulted in a massive number of coin and bullion dealers almost completely out of most products as amply documented by Jason Hommell @

As I said before people are catching on in increasing numbers. Some will only catch on when food prices are so high that they are starving. It is the same as with oil. Although oil may be higher than it would be due to financial buyers there are other factors which can not be derailed. Little is spoken of how not only has the US been filling its strategic petroleum reserve, but many, many other nations are taking similar actions. If this buying were to dry up over night the oil price would surely plummet, however, since the necessary investments have not been made to find huge new pools of oil, it would only be a short-term respite. We can easily see how this has played out in the gold market with gold production still on the decline for the past six years despite a more than tripling in the price. Silver has at least had some supply response but this is more than offset by the many new uses and patents on the industrial side for silver, not the least of which is a new discovery of how to replace platinum with silver in catalytic converters, keeping in mind that platinum is over a hundred times the price of silver. Gold has been termed a bubble by many fools in the media yet demand is soaring and we already know there was no room for any more investment demand in the gold and silver markets as supply and demand has been so tight; thus the creation of the fiat gold and silver markets, the GLD and SLV ETFs. I have also heard some commentators hammer that if you have some gold or silver being held for you then you are safe if you get the serial numbers of the allocated bars that you hold. As I recall in the original audit of the ETF some numbers appeared twice and a few were even listed three times. The point here is that just because someone gives you a number does not necessarily mean you are safe and are absolutely not as safe as if you have the metal in your own possession. The US government gives out knowingly bad economic numbers as policy regularly so why that would give someone confidence is beyond me. For example, this week the government released a number showing first quarter inflation was the lowest for the past four years. Does that make you feel confident in receiving a number or does it terrify you?

As mentioned earlier, when even the commentators on financial TV have caught on and make fun of the latest government inflation reports, the public at large will not be far behind in recognizing the farce of most anything the government reports. The next step is they will seek out a way to protect from further having the value of their money picked from their very pockets through inflation. The people of other nations are far ahead in this process; they have been taking physical metal off the market and into the safety of their own possession. It is time Americans wake up, it is not too late to act to avoid becoming a victim but time is growing very short and if you haven't gotten your financial house in order it will only cost you more to protect yourself from what is coming the longer you wait. It is time to buy all the physical silver and gold that you can and if you can not do that you are much better off with gold and silver stocks than to shoot yourself in the foot by taking the unnecessary risks mentioned above of the ETFs. There are many small gold and silver stocks trading at very low earnings and cash flow ratios and growing at very high rates that are being totally ignored due to the fact that they have been made to "look bad" on their price charts. The junior sector is just overflowing with incredible bargains that are cheap by just about any measure. Remember, if they are priced in dollars that is what is truly going down as are all paper currencies. Once you come to grips with that fact you should know what to do. BUY SILVER AND GOLD AND BEYOND THAT THERE HAS NEVER BEEN A BETTER TIME TO BUY STOCK OF THE JUNIORS.



Richard Greene

Author: Richard Greene

Richard J. Greene CFA
Thunder Capital Management

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