Saturday, April 17, 2010

The Gold in Gold etfs, Now You See it, Now You Don’t

Are gold exchange traded funds (etfs) a ponzi scheme?

London Metals Trader whistle-blower Adrian has stated as much at a Commodity Futures Trading Commission Hearing (CFTC), the US Government regulatory agency, to the chagrin of the London Bullion Market Association (LBMA).

He claims that the worlds largest gold trading center is nothing more than a giant ponzi scheme with trades backed, not by gold, but by a fractional reserve system where 100 ounces of gold is backed buy only one ounce. So if everyone who 'owned' gold in the system demanded their stored value in gold bars and not cash, like a run on the bank, there would not be enough gold to supply the demand.

This is not the first time this has come to light. In 2007, Morgan Stanley forked out several million dollars to settle claims it had charged 22,000 clients for storage fees on non existent silver bullion.

At the hearing also Jeffrey Christian of CPM Group made the revelation that the LBMA banks have one hundred times more gold deposits than … er … gold.

So where IS the gold? Well it seems there never was anywhere near as much as investors have been lead to believe.

Its like a perverted ponzi scheme. Sell gold that does not exist, keep the gold price down with short selling. Everyone is a winner, except for those that want to redeem or take delivery of their gold.

And to cap it off when one does demand their gold and takes delivery, one finds it is really a bar of tungsten coated in rich creamy gold and worth, if your lucky, one hundredth of the gold price. This was recently discovered in Hong Kong when delivery of four 400 ounce LBMA bars were delivered and sparked off a wave of investigations in which further LBMA gold bars were found to be counterfeit.

So we wonder now how many thousands of clients, Asian and Middle Eastern Governments think they own billions of dollars worth of gold but in fact own, at the best, unsecured loans to the banks at a disturbing negative interest rate and at the worse, bits of paper with large numbers on them.

In any event, we will likely see a continuing rise in the gold price as the true amount of gold in the world emerges. Those people, then, who are astute enough to have actually bought real physical gold instead of worthless paper gold will be the winners when the price of gold shoots through the roof.

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