A few days ago we presented an interview of Harvey and Lenny Organ with King World News, in which the Organs recounted their personal visit to Canada’s only bullion bank vault – ScotiaMocatta. According to them, the vault contained roughly 89,000 ounces of gold, in the form of “210 400 oz bars, 4,000 maples, 500 eagles, 10 kilo bars, 10 one kilogram pieces of gold nugget form.” As GATA’s Adrian Douglas confirmed, this was equivalent to about $100 million at today’s gold price. Yet what we find perplexing is the disclosed gold holdings of the iShares Gold Trust, also known as IAU. According to the NYMEX Daily Report the Gold Stock data for the IAU is as follows:
Note that in the above spreadsheet, the iShares total holdings in ScotiaMocatta are presented as 457,173 TOz. In fact, of the total 2.476 million ounces backing the entire IAU ETF, ScotiaMocatta accounts for 18.5%, while Canada in its entirety is responsible for 75.3% of the total underlying “assets.” We wonder just how much actual gold is really held in all of Toronto.
Not very surprisingly, in the IAU Prospectus we read the following:
An investment in iShares is:
Backed by gold held by the custodian on behalf of the trust.
The iShares are backed by the assets of the trust. The trustee’s arrangements with the custodian contemplate that at the end of each business day there can be in the trust account no more than 430 ounces of gold in an unallocated form. Accordingly, the bulk of the trust’s gold holdings is represented by physical gold, identified on the custodian’s books as the property of the trust and held by the custodian in the vicinity of New York, Toronto, Montreal, London and other locations that may be authorized in the future.
Furthermore, it seems that Authorized Recipients, a list consisting of only the following institutions: Barclays Capital Inc., Citigroup Global Markets, Inc., Credit Suisse Securities (USA), LLC, Deutsche Bank Securities Inc., EWT, LLC, Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P., J.P. Morgan Securities Inc., Knight Clearing Services LLC, Merrill Lynch Professional Clearing Corp., Newedge Group USA, PruGlobal Securities, LLC, Scotia Capital (USA) Inc. and Virtu Financial BD LLC, can do something technically known as “Withdrawal of Gold” (actually, the activity is pretty much as expected: it consists of actually withdrawing gold in exchange for paper shares of the ETF).
Authorized Participants, acting on authority of the registered holder of iShares, may surrender Baskets of iShares in exchange for the corresponding Basket Gold Amount announced by the trustee. Upon the surrender of such iShares and the payment of the trustee’s applicable fee and of any expenses, taxes or charges (such as stamp taxes or stock transfer taxes or fees), the trustee will deliver to the order of the redeeming Authorized Participant the amount of gold corresponding to the redeemed Baskets. iShares can only be surrendered for redemption in Baskets of 50,000 iShares each.
Before surrendering Baskets of iShares for redemption, an Authorized Participant must deliver to the trustee a written request indicating the number of Baskets it intends to redeem and the location where it would like to take delivery of the gold represented by such Baskets. The date the trustee receives that order determines the Basket Gold Amount to be received in exchange. However, orders received by the trustee after 4:00 p.m. (New York time) on a business day are treated as received on the next following business day.
The custodian may make the gold available for collection at its office or at the office of a sub-custodian if the gold is being held by a sub-custodian. Gold is delivered at the locations designated by the trustee, in consultation with the custodian. Redeeming Authorized Participants are entitled to express a preference as to where they would like to have gold delivered, but have no right to receive delivery at a specified location.
Unless otherwise agreed to by the Custodian, gold is delivered to the redeeming Authorized Participants in the form of physical bars only (except that any amount of less than 430 ounces may be transferred to an unallocated account of or as ordered by, the redeeming Authorized Participant).
Redemptions may be suspended only (i) during any period in which regular trading on NYSE Arca or the COMEX is suspended or restricted or one or both exchanges are closed (other than scheduled holiday or weekend closings), or (ii) during an emergency as a result of which delivery, disposal or evaluation of gold is not reasonably practicable.
As for the actual IAU shares, well gold old Cede & Co., (DTCC) is in control of those. So in essence purchasing one stock of this particular Gold ETF results in the surrender of all stock certificate rights to the DTCC, even as the Authorized Participants have every right to demand withdrawal of physical.
Now as pertains to who makes sure that physical delivery would be met once the demand is there, we read the following:
In addition to the public nature of the pricing, futures exchanges in the United States are regulated at two levels, internal and external governmental supervision. The internal is performed through self-regulation and consists of regular monitoring of the following: the open-outcry process to insure that it is conducted in conformance with all exchange rules; the financial condition of all exchange member firms to insure that they continuously meet financial commitments; and the positions of commercial and non-commercial customers to insure that physical delivery and other commercial commitments can be met, and that pricing is not being improperly affected by the size of any particular customer positions. External governmental oversight is performed by the CFTC, which reviews all the rules and regulations of United States futures exchanges and monitors their enforcement.
Gold futures opened for trading on the COMEX on December 31, 1974, coinciding with the lifting of the Government’s ban on gold ownership by private citizens in the United States.
So now we go back to the matter of the slight discrepancy between what IAU discloses is held in ScotiaMocatta and what, according to the Organs, is actually held there. In a high aggressive case, in which we assume that at least half the gold in the vault is the property of the iShares ETF, that would mean that 44.5k ounces are deliverable to IAU holders at any given moment. Yet according to the COMEX the IAU has 457,172.6 ounces deposited in the vault: a 10-to-1 dilution. Should one continue this line of thought and extrapolate a comparable dilution of IAU holdings in all the other vaults, it would appear that instead of holding just under 2.5 million TOz of gold, the ETF only has access to one-tenth of this amount, or just under 250k troy ounces. What this also means is that total net assets of the fund at nor $2.9 billion as disclosed, but more like $290 million, and that in the spirit of Fractional Reserve Robbery and Dilution, each and every holder of the IAU really has asset coverage of just 10%. Should there be a full physical delivery demand by every single holder, the result would be the unpleasant discovery that in this ETF alone all the holders have been forcefully “diluted.” And where did the extra physical bars go? We do not know, but the phrase Authorized Participants (including JPM and Goldman) comes to mind. Are precious metal ETFs nothing more than a perfectly legal way for the big banks to transfer paper in exchange for actual physical gold holdings? Have the big banks already defrauded the IAU (and, quite possibly the GLD and SLV) ETF by 90%? Is this the greatest precious metal robbery ever conducted, all before the wide open eyes of the CFTC and other regulators, even as actual holders are blissfully unaware that by holding such ETFs they have nothing more than access to some pretty pieces of paper (which even are not their property, but, when push comes to shove, that of the DTCC).
When the dilution is complete, and when ScotiaMocatta is empty of all gold, perhaps then finally the great wealth transfer process will finally be done, as at that point fiat currency can finally be debased- after all the morts will have access to exactly zero physical when they demand it. It will all have long been pocketed by the Authorized Participants of the world.
With thanks to MarketSkeptics and h/t Satchmodian