Paper promises for GLD are not the same thing as gold

I believe that wherever there is an opportunity to bend the rules, cheat, sneak, commit quiet fraud, and so on, such happenings will occur.  It falls under the same classification as Bill Clinton's self proclaimed reasoning for futzing around with Monica Lewinski:  "Because I could".  It's just the nature of man.  There's an old saying, "don't tempt an honest man".  Fiat currency and fractional reserve banking have few rivals when it comes to their power to tempt men.  

This brings me to the topic of the GLD fund.  People have been told that it is "like gold" or that it "trades in step with gold" but since it is not gold wise people will be looking at it sideways wondering when the gold plating is going to wear off.  In short, paper promises for gold are not the same as gold in the hand.  In a fair economy where people don't have their heads up their a$$es, nobody would ever value paper promises for gold in the same way they would physical gold.  Why?  Because gold is a crisis haven and in a crisis possession often becomes 9/10ths of the law.

As the credit con collapses, people again return to their senses.   They begin to value what is honest and right, and they begin to look down again on things that are corrupt and worthless.  The credit con had that flipped completely on its ear, but with its ongoing collapse the healing process is upon us and so I expect to see lots of interesting stuff happen.

One thing I have always warned my family and friends to be on the look out for is when the GLD ETF begins to diverge from the price of physical gold.  Why should that ever happen?  After all, doesn't the GLD fund actually own enough gold to completely back investors in it?  Yeaaah, right.  To believe this is to ignore the nature of man as expressed at the top of this post.  The GLD fund allows certain people to tell everyone their gold is present and safe without actually having to prove it to anyone.  In other words, "trust me".  Only a fool trusts someone else to hold his money during an economic collapse.

So has the divergence been happening?  Yes, it has.  The divergence is still small at this point but it is steady.  At some point I expect that the divergence will grow rapidly, perhaps with exponential speed.  Here is a recent snapshot of gold vs. GLD:  As you can see, the average slope of that relationship is up and to the

right.  In December of 2009, the average ratio between spot gold and the GLD fund was 10.150:1 (its supposed to be 10:1).  Now it is 10.251:1 with an instantaneous ratio of 10.350:1.  That's a 3.5% divergece.   That may sound like a small number but keep in mind that GLD claims it has 66.14 billion USD in reserves according to Yahoo Finance.  3.5% of that is 2.3 billion with a B.  As in missing.  Gone.  Up in smoke.  Absconded with.  IMVHO of course.

Of course a billion isn't what it used to be but if certain things happen in the world, confidence could be lost in the GLD fund and it could diverge rapidly from the price of real, physical gold leading to very large losses for investors in it.  In fact, that is exactly what I expect that we will see happen in the coming years.

I suspect (as in it's just my opinion) that the GLD fund is a fractional reserve system.  It probably takes in money from investors, buys some of the gold it says it owns, and then buys options or some other leveraged paper claim on gold to account for the rest of its stated gold holdings.  There is no telling what the ratio of physical gold to paper promises is but the more of this they get away with, the more they will try to get away with.

Why would the GLD fund do something like this?  To try to increase profits of course.  It is not free to store gold metal (security costs, etc.), yet nobody who owns the GLD fund pays storage fees.  Investors think they are getting something for nothing but they are really just getting chiseled.  In fact, they might be getting "the business".  As in fraud.  As in the GLD fund could be taking the money they are not spending on physical metal and using it to gamble in other markets.  You can think of this as gambling with your money without you knowing about it which is, unfortunately, very similar to what fractional reserve banks do.  In fact, intelligent people understand that GLD is likely a way to fractionally reserve the physical gold stocks of the world, thus creating a fake, paper supply of gold that isn't worth the stock ticker it trades under.

So what is the end game for something like this?  In short it’s the same as the end game for fractionally reserved banks: a run on the bank.  In other words, customers wake up to the reality of the economic crisis and begin to fear that their money might not be safe.  As a result they withdraw their money leaving the fractionally reserved system even more fractionally reserved than it was before.  At some point there is a default (no gold left to return to those whose accounts say they have some on deposit) and people get stiffed.  Nixon in 1971, anyone?

What might a run on the world gold system look like?  Well, when you see big gold players demand their money back from the gold storage banks that they have used for years, that would be the best indicator.  In fact, the 15th largest gold holder in the world, Venezuela, is doing exactly that as I type.  They want all of their 200+ tons of gold that are stored in vaults around the world returned to them right now.  Gee, this is strange timing for that, ya think?

The final thing I will leave you with is this:  why would anyone choose to buy paper gold in the GLD fund instead of owning the physical metal?  Physical gold is nearly indestructible and it is very small and so easy to hide.  So why are sheeple lined up to plunk down their hard earned cash for paper gold?  The bottom line is that they still don't trust the physical metal because they have been brainwashed into believing that the only real money in the world cannot be trusted or is in some way "risky".  They want to be light on their feet so they can be the first one out of the "bubble" when it pops.  That's hard to do with physical items, but just a mouse click away with an ETF. 

All I can say about that is that it is the same thing Madoff victims thought.  They knew something was wrong with the outsized returns he was giving but they just thought they would be faster than everyone else getting to the door if a collapse hit.  But by definition, most people trying to exit a fraudulent situation have to lose out.  That is the nature of fraud.  I thus predict that before this crisis is over, GLD will prove to be a fractionally reserved fund to a significant degree (think 20% but it could easily be higher - they are short by perhaps 20% of the stated gold IMO) whose paper claims on gold are not worth nearly what people were promised they would be.  People in GLD will someday wish they hadn't tried to be slick dick market traders.  Keep your eye on the gold:GLD ratio.  It is the canary in the fractional reserve GLD fund coal mine.