Are Gold ETF Bar Inventories to Be Trusted?
Most of the conspiracies were offshoots of the now entirely demolished Gold Anti Trust Action Committee railings about a scheme to artificially suppress the price of gold. They were watered from time-to-time by competitors who correctly identified the threat SPDR Gold Shares (GLD) would pose to their businesses; not to put them out of work, but in siphoning away the lion's share of the market.
Not all there
The phantom gold accusations have several forms which can be distilled as:
- the bullion inventory is fake and/or untrustworthy;
- investors don't have unfettered ownership of the bullion underlying the shares;
- it's not really gold because you can't take delivery of physical product; and
- ETF investors have less rights than ordinary investors.
We confined our interest to the first allegation – that exchange traded gold funds do not possess "audited gold". The other complaints are matters of individual investor preference and risk tolerance. So far we think the market has spoken unambiguously on those last three points.
"Unaudited gold" is a serious charge because it implies fraud. None of the accusers has gone so far as to allege actual fraud, but you'd need to be dimwitted to believe that that was not the underlying claim.
Some time has passed since the initial "gotcha" moments which revolved around duplicate bar numbers. All the duplication problems were satisfactorily resolved, but it was reasonably damaging to retail gold bug confidence because they had been softened up to expect the worst; it was literally a self-fulfilling prophecy.
Open audit
Since then the inventory of gold bars linked with an expanding number of ETF products has grown exponentially. Combined with the strict qualifications for London Good Delivery Bars, that provided us with an opportunity to subject the fake bullion claim to impartial statistical tests.
If the bullion inventory does not really exist but is artificially created and maintained there will inevitably be tell-tale statistical signals flagging tampering and manipulation. It's not too far removed from the sort of number crunching that revealed Bernard Madoff to be a crook long before the Securities & Exchange Commission could find a reason to lay a finger on his books.
By comparing multiple inventories, the likelihood of finding untoward activity rises dramatically. Put another way, if it really is just paper gold, then the issuer would need to go to extraordinary lengths to manufacture a plausible proxy for the claimed underlying metal. In fact, the costs of maintaining such a scheme over time would vastly exceed storage, insurance and audit costs, never mind the risk of being found out.
The testing parameters are nearly perfect for such an exercise:
- Quality is controlled by the London Bullion Market Association.
- Accredited melters and assayers are widely dispersed.
- They mostly acquire their product from regional sources.
- The underlying product is tightly unitized:
- London Good Delivery Bars must ideally contain 400 troy ounces of gold refined to a purity of 999.9 parts per 1,000.
- The purity tolerance is strenuous:
- assays of 999.5 and higher must test within ±0.05 parts per 1,000.
- assays of less than 999.5 must test within ±0.15 parts per 1,000.
- The minimum acceptable gold content is 350 troy ounces.
- The maximum acceptable gold content is 430 troy ounces.
- The minimum acceptable purity is 995 parts per 1,000.
- Length, width and height are specified.
- Each bar must be uniquely identifiable with four marks - serial number, refiner stamp, fineness, and year of manufacture.
We evaluated 87,662 gold bars weighing 35.2 million troy ounces and worth around $46 billion (see Table 1 above and Table 4 after the link below. Click to see gold bar inventory detail). That represents all of the inventory underlying the ETF Securities funds, and roughly 60% of the SPDR Gold Shares inventory as of late October.
It is notable that the two organizations maintain different inventory reporting protocols even though they have common founders. That's an important factor in looking for manipulation. A fraudster always seeks to mimic and cloak rather than differentiate because it avoids attracting attention.
Another telltale sign of untoward activity is a lack of transparency. Yet you can download the inventories at any time. In the case of GLD we did have to ask for a spreadsheet version rather than a PDF format, but it was quickly forthcoming. That's not the hallmark of market bandits; more so since the World Gold Council has always been a little skittish in dealing with us for the better part of a decade.
Key variances:
- SDPR Gold inventory weights are reported to thousandths; ETFS to hundredths.
- ETFS reports a bar brand, GLD does not.
- Refiner names have different nomenclatures in each organization.
- The inventories have different geographic characteristics.
Comparisons
To facilitate direct comparisons we had to standardize the bar brands, adding the full refiner name along with the city and country that each bar was manufactured in. That provided an enormous amount of additional power to our task because the data could be sliced in many more ways in the search for anomalies.
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