Wednesday, April 21, 2010

Do You Own Gold - A Follow Up

A couple of months ago, I spent some time reviewing the prospectus for the iShares Gold Bullion Trust. This is an exchange traded fund (ETF) with the ticker symbol GLD. In my interest of owning exposure to gold and owning it to protect myself from the possibility of a currency problem, GLD was convenient. Then came the popularity of GLD and some other ETF's, followed soon after by various writer's claiming expertise, who were sounding alarms about an environment where misrepresentations or fraud could exist. I could not prove or disprove these claims but I felt I could review the prospectus in the light of these claims and come to a conclusion, will I stay or will I go. Am I a trader or an investor?

I described my review in the post titled Do You Own Gold?. I decided to leave, and today I have no position in GLD. I bring this up because I came across a well written article by Erik Townsend who I know nothing about. His article on Financial Sense, "Debunking the Post - CFTC Precious Metals Fearmongering Campaign" covers some of my concerns about GLD and similar investments, though it is principally discussing the silver market. He also references recent government interest in the metals markets by describing portions of the Commodities Futures Trading Commission (CFTC) meeting.  They held a public hearing on position limits in the COMEX Precious Metals futures market on March 25, 2010.

Gold and silver investors are not alike. Silver is an industrial metal with many applications and no known limits to its supply. Gold has few applications, including jewelry, limited industrial applications, it is a store of value in any form, and it is scarce. The silver and gold markets have some price making similarities. The Townsend  article is one I want to maintain access to and for any reader who has any concerns about the integrity of the metals markets, he helps describe the conditions better than any prospectus can. One of his observations is that there are legitimate reasons to be concerned, or to question the paper gold to real gold relationship. The ETF marketers could be better at supplying technical evidence in place of the 8x10 color, usually glossy, photographs showing men in suits leaning on hundreds of bars of gold colored bars in a vault. I will not return to GLD as an investor but I would as a trader.

The letter from Erik Townsend has also been responded to by Chris Powell, an officer of the Gold Anti-Trust Action Committee Inc. (GATA), in an article titled "A Reply to Erik Townsend". (I want to point to the emphasis added showing that GATA is a for profit corporation rather than a committee that their name implies.) That letter has prompted a response from Jefferey Christian, a precious metals industry insider and recognized expert, who describes GATA from how they came about to what they are attempting to accomplish. Inquiring minds interested in learning more about these markets will find this information enlightening.

Addendum: Since the date of this post, there have been several letters written in response to the criticism of GATA and the lack of their effectiveness in the Erik Townsend letter, one from Jeff Christian (linked above), and at least two (one is linked above) from Chris Powell, representing GATA. Townsend has included his response to the first Chris Powell letter too. The benefit of this back and forth positioning is that there is a chance for me to build a deeper understanding of the complexity in the metals markets, even if I never understand them all that well. To this point I want to add to the links included above a link to a letter from Chris Powell that is rich with its own links to factual information he references. One belief that comes through in the arguments of these metals market observers is that there is a absolute lack of visibility or credibility. Understanding more about these markets is necessary, and difficult, for anyone wanting to participate. For my purpose, I believe I am creating a deep well of knowledge for future reference on this topic. Scanner