Paper Gold vs Physical Gold ratio?

rmpsrpms

Does anyone have verifiable data showing how much "paper gold" in the form of ETF shares or other monetary instruments exist as a ratio to "physical gold"? I know this is a difficult question since no one really knows how much physical gold exists or where, but I've read recently that the ratio is as high as 10:1. The ratio potentially makes sense if the ETF's are allowed to operate in "fractional reserve" at 10:1 paper to physical ratio. But a 10:1 ratio would imply that virtually all physical gold is levered 10:1, which doesn't make sense at all. So, any data? Can anyone verify if ETF's indeed are operated at 10:1 fractional reserve?

A corollary to this is the question of what will happen to the ETF's if the "gold bubble" (if there is one...) bursts? As long as there is physical delivery possible from an ETF share, the share price should still track physical price, but if there is a "run" and too many folks demand delivery the whole fractional reserve scheme falls apart. What are folks expectations if / when the bubble bursts?

MoneyCollector

I just looked at IAU on yahoo and it says it holds 100% reserves. Same with SLV. I looked for a prospectus but haven't found it. I haven't studied these enough to understand them thoroughly but if they are similar to a closed-end fund I could see how they could have 100% reserves. If they are more like a mutual fund, how would they physically move gold in/out as needed?

Randy

ksammut

CNBC interviewed the head of an new ETF the other day. I believe the symbol is GLTR. He explained that every share is backed by PMs they hold. To be able to create more shares, they would have to go out and purchase more metal (so it is not like a close end fund). His ETF has gold, silver, and 3 or 4 other metals so each share buys a basket of metals unlike a gold ETF just having gold.

If money pours in, they buy more metal. If investors sell their shares, they have to sell some of the metal they have stored to make payment. I believe it works that way for most of the ETFs.

CaptHenway

You know, being in the end of the business where we have to physically handle, move, stack and store PM products, I just can't see how these ETF's can handle all their ounces IN PHYSICAL FORM and still be able to sell at virtually melt. It just don't add up.
MOO
TD

ksammut

<< <i>You know, being in the end of the business where we have to physically handle, move, stack and store PM products, I just can't see how these ETF's can handle all their ounces IN PHYSICAL FORM and still be able to sell at virtually melt. It just don't add up.
MOO
TD >>



That has crossed my mind too. I wonder if they are able to keep a cash reserve of X but still be able to say they are 100% invested?

HalfStrike

I think it depends on the fund and how they have set things up, but from what I have read with at least a couple of ETFs is it becomes very hard to get physical delivery of the precious metal if one owns the ETF, they have a custodian that may be in a foreign country and then you have to own a large number of shares, or a block, to get delivery.

It comes down to it is easier to sell the ETF and buy the physical through other means.

So if gold prices burst I doubt many ETF holders would want physical delivery because you lose that liquidity, that is what the draw is to the ETFs.

CaptHenway

And if the ETF goes out of business????????

CaptHenway

<< <i>I think it depends on the fund and how they have set things up, but from what I have read with at least a couple of ETFs is it becomes very hard to get physical delivery of the precious metal if one owns the ETF, they have a custodian that may be in a foreign country and then you have to own a large number of shares, or a block, to get delivery.

It comes down to it is easier to sell the ETF and buy the physical through other means.

So if gold prices burst I doubt many ETF holders would want physical delivery because you lose that liquidity, that is what the draw is to the ETFs. >>



The physical may be in a foreign country?
Like Red China, perhaps??????

jmski52

I studied the prospectuses for SLV and GLD before I bought any SLV a few years ago, and I simply couldn't find verification of who owns any physical metal. They are set up as trusts with trustees. It's there in black & white - "The Bank of New York is the trustee of the trust, and JPMorgan Chase Bank N.A., London Branch, is the custodian of the trust."

"Silver owned by the trust will be held by the custodian in England, and other locations that may be authorized in the future. The agreement between the trust and the custodian is governed by English law."

In the prospectus, it clearly states as clear as they are willing to allow, "Each iShare represents a fractional undivided beneficial interest in the net assets of the trust." It goes on to state that the assets of the trust consist primarily of silver held by the custodian on behalf of the trust, but then goes further in describing about every other scenario which would allow them to hold cash, settle in cash, cover expenses in cash and just about every other contingency, in cash.

It never states that the assets be held with a minimum percentage of silver bullion, specifically. So the upshot is that they can do whatever they want until they get caught not doing it.

After playing with SLV awhile, I took a thousand bucks of theirs, got out, and never went back.

Note that the custodian is our buddies at JPMorgan Chase. Oh, my! Aren't they the same ones who have all that silver shorted!!!

Also, as I was digging out my prospectuses, I came across a summary done by James Turk (probably printed from his website), and he came to the conclusion that the ETFs were not a substitute for holding physical metal.

Santelli made similar remarks just this morning. The word's been out now for some time and people are "getting it".

HalfStrike

"Silver owned by the trust will be held by the custodian in England, and other locations that may be authorized in the future. The agreement between the trust and the custodian is governed by English law."

Yes thanks for that, it proves what I said is not a conspiracy job

They need to be able to buy and sell large volumes of PM's if necessary so may hold it outside of the US. I am not sure what people expect but the chances are slim anyone cashes these out in precious metals, that actually goes against what the ETF is set up for. It is a liquidity play to move in and out rapidly, not set up to buy the ETF and then convert to physical.

The ETFs are however buying physical and futures to cover the buying as the ETFs have done a lot to drive the prices of the metals higher. When people move against them I expect it could have a rapid move to the downside as well when the ETFs need to liquidate.

rmpsrpms

<< <i>The ETFs are however buying physical and futures to cover the buying as the ETFs have done a lot to drive the prices of the metals higher. When people move against them I expect it could have a rapid move to the downside as well when the ETFs need to liquidate. >>



If they actually own physical gold or futures, then there could NOT be a run on the ETF. The price is backed by the value of the asset, no way to run it!

I suppose I should put up a poll on this but I doubt very many folks here really believe that the ETF's actually have physical gold or securities to fully back their shares. If they did, you would not buy a share whose price more or less correlates with the price of the PM. What they say is that their price is "generally correlated to the value of the holdings of the" PM they track. Since the price is not 1:1 with the PM it's easy to game the system.

HalfStrike

SLV is an iShares ETF according to the website.

iShares ETF linky

roadrunner

Also, as I was digging out my prospectuses, I came across a summary done by James Turk (probably printed from his website), and he came to the conclusion that the ETFs were not a substitute for holding physical metal.

This question was discussed recently on ZeroHedge because as gold has moved up over the past several months, the GLD inventory has not increased. That would imply that new buyers of gold are now looking to either allocated or hand-held bullion, other ETF's, or gold stocks.

roadrunner

rmpsrpms

<< <i>SLV is an iShares ETF according to the website.

iShares ETF linky >>



According to that page:

""The objective of the iShares Silver Trust is for the value of the shares of the iShares Silver Trust to reflect, at any given time, the price of silver owned by the iShares Silver Trust at that time, less the iShares Silver Trust's expenses and liabilities.""

This says nothing that is inconsistent with fractional reserves. The word "reflect" means nothing. In fact the situation is possibly even worse by that description, since if the trustees decide to sell 50% of the holdings and pocket the cash, the shares would simply drop by 50%, since they are "reflecting the price of silver owned by the trust".

derryb

A lot of the sellers claim to hold physical on your behalf, but who really knows, except them. You will never find a true answer to the amount of sold gold not backed by physical holdings.

TomB

Obviously I could not prove it, but I don't believe for a second that these ETF funds hold any significant backing in the PMs that they represent.

Justacommeman

I agree with TomB 100%

MJ

jim2527

The scenario being discussed is exactly what happened with oil 2 years ago. At the peak of the oil boom the paper to physical ratio was 15:1.

Overdate

There are several gold and silver ETFs out there, and I doubt that they are identical to each other in terms of the percentage of actual metal they hold.