One of the most highly respected fund managers in Singapore shocked King World News when he said that custodians of the ETF GLD have refused to give people physical gold in exchange for the shares. Grant Williams, who is portfolio manager of the Vulpes Precious Metals Fund, also warned that the massive and escalating paper claims on physical gold at the COMEX warehouse are going to create an explosion in the price of gold. Below is what Williams had to say as KWN readers around the world take another trip down the rabbit hole.
Eric King: Grant, I wanted to ask you about paper claims on gold. They have reached another new all-time high. I think when you wrote (on KWN) about this initially it was around 42 to 1 (42 claims for every ounce of physical gold that exists). I think we have now surged all the way up to 54 to 1.
Grant Williams: Yes, we’re up around 55 now, Eric. We’ve seen the gold being drained out of the COMEX almost non-stop this year, certainly since the Bundesbank repatriation request. So, to see the claims mounting is no real surprise….
It hasn’t had any noticeable effect just yet, but it really is a spring that is continually being coiled, and at some point it is going to snap back. And when it does, with all of these disparate claims on each ounce of gold, there is going to be some fireworks, no doubt about it.
It’s tough to see how this is going to gradually work its way back (to normal). It’s hard to see big piles of gold come creeping slowly back into these COMEX warehouses, and (thereby) alleviating the situation. So, at some point it’s going to have to give, and when it does the numbers speak for themselves — 55 claims on every ounce of gold. There are a lot of people that aren’t going to get their gold (see Nick Laird’s chart below).
Note: Take a closer look at the portion of the Sharelynx chart below which illustrates the COMEX ‘Registered Gold Stocks’ and the ‘Open Interest’ or paper claims on the COMEX gold:
And, ultimately, a lot of the reason people want to own gold is because they want physical custody of something that can’t be debased, can’t be devalued, and doesn’t have any other claims on it.
Of course trading through futures or ETFs is a very dangerous game to play at certain moments in time, and it really feels like we are approaching one of those moments. The ETF is the preferred vehicle for most casual investors investors in gold. They like to buy the ETF believing it’s as good as owning gold, but unfortunately, when push comes to shove, it really isn’t.
The mechanism of the way the ETF works means that unless you own it in significant quantities, you don’t have anything like a claim on the real underlying asset. And there are even stories about plenty of people who have actually tried to take significant amounts of ETF shares and exchange them for the physical metal, and been told that they can’t have it (the gold).
So, there is nothing like owning physical gold in your possession, free and clear. For every one of those 55 people (or entities with claims on gold), only one of them is going to get that ounce of gold when the day of reckoning comes.
Eric King: What you just said, Grant, is astonishing because the GLD ETF is set up so that you can exchange shares for (physical) gold, and you are saying that people (or entities) have been turned down.
Williams: Yes … The minimum basket of shares you need now is roughly $14 million worth, and I’ve certainly heard stories of people who have taken that kind of size redemption requests to the custodians and been told that they can’t have the gold.