paper precious metals versus real precious metals

[grapejelly]

Metals and oil and all commodities have crashed. Silver has crashed, down better than 55% from its highs, 20% fall just today.

Gold crashed almost 10% today.

Why in a time of financial panic, do these traditional havens fall?

Remember, the trade of the past five years has been long financials, long energy, long commodities.

Now that is unwinding in a hurry...sell financials, sell energy, sell commodities. It's all about liquidation, no?

The GLD and SLV ETFs are the 800 pound gorilla in the room right now, when it comes to physical gold and silver pricing.

But paper gold and paper silver have little to do with physical.

The ETFs are supposed to buy and sell physical rapidly, to maintain parity with the "market" price.

But when they sell, who is buying? And when they buy, who is selling?

Could they be shuttling gold and silver from one set of books to another, while really not exposing it to the market, or going out to the market to buy?

Could this be a cozy shuffling of assets on the books? Maybe they aren't buying or selling on the open market at all...

[loweyecue]

Re: paper precious metals versus real precious metals

After reading the paper default thread I liquidated my holdings in GLD day before yesterday, I think retained about 3% profit. Now I have no idea where to park teh cash in my 401K account. :confused:

[ASH]

Re: paper precious metals versus real precious metals

Could they be shuttling gold and silver from one set of books to another, while really not exposing it to the market, or going out to the market to buy?

Could this be a cozy shuffling of assets on the books? Maybe they aren't buying or selling on the open market at all...

I recently looked into the mechanics of this.

Gold goes into and comes out of GLD in large incremental transactions that correspond to 100,000 shares (so-called Baskets). The amount of gold associated with a Basket is determined by dividing the number of ounces of gold held by GLD by the number of Baskets outstanding. This is supposed to preserve the gold-per-share-outstanding.

The participants in these transactions include HSBC Bank USA, N. A., which is both the Custodian and market-maker for GLD, and various major financial institutions (e.g. Goldman Sachs) which have set up unallocated gold-trading accounts with the Custodian. The firms which can create or redeem Baskets are called Authorized Participants. The transactions are coordinated by The Bank of New York, Mellon, who is the Trustee for GLD.

If shares of GLD are traded, then there should be no impact upon the price of gold, as only the ownership of the paper is changing hands. If you as a retail investor sell shares in GLD, then most likely there is another retail buyer of the shares on the other side of the transaction. In this case, there is no interaction with the gold market.

However, if the buyer is an Authorized Participant, then they may choose to redeem shares of GLD. In the event of a sale by an Authorized Participant, the following should happen. The Authorized Participant places a redemption order with the Trustee, and transfers the shares it wishes to redeem (in increments of Baskets) to the Trustee. The Custodian transfers gold bars from GLD's allocated account first to GLD's unallocated account, and thence to the Authorized Participant's unallocated account.

The gold bars in GLD's allocated account are segregated from HSBC's general assets, and are tracked by number. So, in the redemption process, the specific gold bars which belong to GLD get co-mingled with HSBC's general assets in exchange for credit an an unallocated gold account. This credit is transfered to the Authorized Participant who has redeemed its shares in GLD.

This is where things get murky. The Authorized Participant now has credit for unallocated gold held by HSBC. They can presumably arrange for physical delivery of this gold and then sell a contract for physical delivery on the appropriate market, they can continue to hold it in an unallocated account with HSBC for future trading, or I imagine they can sell the unallocated account credit to another client of HSBC. One supposes that the latter option would amount to "paper shuffling" of the type you describe.

That said, unless HSBC is crooked, I believe there is a 1:1 relationship between gold in HSBC's vaults and credit for unallocated gold. Therefore, physical delivery of gold based upon credit for unallocated gold should be possible, and this ought to prevent a major difference in price with the spot price for delivery of physical gold.

The dangerous thing, as far as I know, is that unallocated gold held by HSBC is not segregated from HSBC's assets, so if HSBC goes bust, holders of credit for unallocated gold may get shafted. Also, I don't know with 100% certainty that HSBC's gold is held on an unencumbered basis, and I have not verified that there really is a 1:1 mapping between credit for unallocated gold and actual gold bars. (This latter point is not specifically a risk factor for GLD, because all of GLD's holdings not involved in an immediate transaction are segregated in an allocated account.) This, however, is a separate issue from the one you raise.

[Supercilious]

Re: paper precious metals versus real precious metals

That said, unless HSBC is crooked, I believe there is a 1:1 relationship between gold in HSBC's vaults and credit for unallocated gold. Therefore, physical delivery of gold based upon credit for unallocated gold should be possible, and this ought to prevent a major difference in price with the spot price for delivery of physical gold.

Ash I'm no lawyer, but I couldn't find anywhere a clear statement saying that the Trustee cannot use the physical metal for collateral or lease-collateral.

let's not forget that the trustee is the Bank of NY Mellon ;)