Goldman Sachs Fraud Charges and the Effect on Physical Gold and Silver

I suggested to some colleagues earlier that, ulitmately, this Goldman Sachs derivatives scandal will further hasten investor distrust of paper “assets” and most likely accelerate the ongoing large flow of capital into phsyical gold and silver (and the movement toward investing strictly in gold/silver vehicles that offer verifiable, authentic custody) and ultimately cause the price of gold and silver move a lot higher.
The market itself has offered us an interesting way in which to measure this view today.  Take a look at the price of GLD and PHYS.  I’m basing this on market prices at 12 p.m. Denver time today.  GLD is down about 2.5% and PHYS is down about .6% from yesterday’s close.  Why would this be the case?  They both are vehicles which invest exclusively in gold (or so GLD claims), they both permit big investors to exchange their shares for delivery of gold and therefore they should both perform in-line with the price of gold AND in-line with each other.

But we know better than that about GLD.  GLD is a paper Ponzi scheme and all credible allegations of this have gone completely unchallenged by the sponser and trustee of GLD (see my report on this here:  GLD is dubious.  On the other hand, Sprott’s PHYS buys 400 oz. LBMA gold bars and safekeeps them at the Royal Canadian Mint.  If you go through their prospectus, PHYS prospectus, you will find that the bullion is held exclusively in a segregated account and Sprott can go inspect it pretty much on demand.  That is not at all possible with GLD and the GLD prospectus prevents that from happening.

Anyway, let’s go to the true test, which is the market.  The PHYS stock price trades at a premium to its underlying Net Asset Value.  You can track this here:  NAV.  GLD simply indexes the price of gold, less some concession for the expense of running the trust.  As of yesterday, the PHYS stock closed at an 11% premium to its NAV (there are several reasons for this, but mostly because of the way the prospectus is structured).  At noon Denver time, when the price of gold was getting slammed with the stock market, GLD was down 2.5% on the day, while PHYS was down only .6%.  The reason for this is that the premium on PHYS expanded to 16%.  The only explanation for this is that investor money flowed into an asset that is verifiably backed by physical gold.  It’s the only explanation because, all other things being held contstant (“ceteris paribus” for you economics jockeys), GLD and PHYS should have declined by the same percentage.

This is a perfect market laboratory in which to measure the true differentiation between GLD and PHYS – between a paper Ponzi asset and REAL GOLD.  Remember:

As a matter of fact, a good friend of mine yesterday sold his GLD position and bought PHYS at exactly the same time.  Today his PHYS is actually up 10 cents from where he bought it yesterday, whereas GLD is getting decimated.  Got gold?  Are you sure it’s the real thing???

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