miércoles, 1 de octubre de 2014

miércoles, octubre 01, 2014

Gold Will Bottom Soon - What Do You Need To Know?
             
 
 
Summary
  • Gold will likely bottom within the next 6 months.
  • There are a multitude of investment opportunities for gold.
  • The GLD ETF should be last on your list of long term investment opportunities.

I think it is time for another dose of reality for both those who have been severely battered in the metals market over the last 3+ years, as well as those who have followed our analysis at Elliottwavetrader.net, and have significantly profited during that same time.

While the sentiment of late has been shown to be quite bearish in the metals market, I still do not believe that a final low has yet been seen. But, since we have a set up in place to take us to those final lows within the next 2 months - assuming we maintain below the resistance levels I have cited in my shorter term analysis on my weekly Seeking Alpha articles, as well as the more detailed charts we provide at Elliottwavetrader.net, I think we can see even more extreme sentiment in metals before our final lows are met.

So, now the question on the table for most investors is what do we do now? Well, my answer is still to maintain some patience. I am relatively confident of the fact that we will see lows in gold below the 2013 lows, which will set up long term buying opportunities you will not see again for many years to come.


Where Should You NOT Put Your Money For Gold?


When you invest in precious metals, you have to consider your goals and objectives. Many view metals as insurance against government or financial system collapse. Others view it as a capital investment within their larger portfolios. But, no matter how you view the metals, there is one very important factor you must consider no matter for what purpose you choose to invest in precious metals. And that is assurance of maintaining the value of your investment, which is apart from the market risks one accepts when entering into any investment.

When deciding upon your investment vehicle, you have many choices. One can invest in metal bars, metal coins, collectible metal coins, metal ETF's, or even options on metal ETF's. While there are benefits and draw backs to each of these vehicles, the purpose of this article is to highlight the serious dangers involved if your long term investment vehicle of choice is a metal ETF.

You probably may not know that I am an attorney by training, so I was able to read through the prospectus and identify certain troublesome sections with that legal document. While I clearly cannot offer a legal treatise on the pitfalls inherent in these vehicles. I am hoping to at least give you a taste as to how toxic these funds are and should not be seriously considered as long term investment vehicles.

First, let's look at the Risk Factor section of the GLD prospectus. Specifically, the first section I would like to highlight states:

"Neither the Trustee nor the Custodian independently confirms the fineness of the gold allocated to the Trust in connection with the creation of a Basket [issuances]."

The prospectus goes on further to state:

"In issuing Baskets, the Trustee relies on certain information received from the Custodian which is subject to confirmation after the Trustee has relied on the information. If such information turns out to be incorrect, Baskets may be issued in exchange for an amount of gold which is more or less than the amount of gold which is required to be deposited with the Trust."

These two sections should be alarming to anyone who actually takes their investments seriously.

These are basically disclaimers by the Trustee regarding the quality or even the amount of the gold being held in trust for the ETF. Furthermore, it does not seem as though the Trustee has a specific obligation to confirm the gold deposited in the trust actually exists. Rather, the Trustee is permitted to rely upon information given to it. Again, please note that there is no absolute legal requirement which I have seen incumbent upon the Trustee to ensure that there is sufficient gold in the Trust as represented by the amount of shares sold in the ETF. To make matters even more tenuous for holders of shares in the GLD, the prospectus further provides that:

"In addition, the ability of the Trustee to monitor the performance of the Custodian may be limited because under the Custody Agreement the Trustee has only limited rights to visit the premises of the Custodian for the purpose of examining the Trust's gold".

"In addition, the Trustee has no right to visit the premises of any subcustodian for the purposes of examining the Trust's gold or any records maintained by the subcustodian, and no subcustodian is obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian."

So, not only does the Trustee have no obligation to ensure that there is sufficient gold within the Trust, even if it wanted to do so, it's ability is further limited by the contractual relationship it has entered into with its Custodian within the Custody Agreement. Furthermore, if there is a subcustodian holding gold for the Trust, the Trustee has no right to ensure the existence and accuracy of the gold reported and being held by such subcustodian. This truly blew my mind when I read this. Forget about even requiring an audit, which it clearly does not, the trustee cannot even step onto the premises of a subcustodian or even review the records of the subcustodian.

So, let's move on to the next major issue with the GLD. The prospectus clearly states that "The Trust does not insure its gold." Yes, you read that right. The trust does not insure its gold. It goes on further to state that:

"If the Trust's gold is lost, damaged, stolen or destroyed under circumstances rendering a party liable to the Trust, the responsible party may not have the financial resources sufficient to satisfy the Trust's claim."

So, the prospectus is clearly warning you that there is no entity nor is there any insurance backing potential risks of loss to the physical gold on hand.

And, yes, folks, it can get worse. There are further counter-party risks that make this investment vehicle even less appealing to own as an investment:

"Gold held in the Trust's unallocated gold account and any Authorized Participant's unallocated gold account will not be segregated from the Custodian's assets. If the Custodian becomes insolvent, its assets may not be adequate to satisfy a claim by the Trust or any Authorized Participant. In addition, in the event of the Custodian's insolvency, there may be a delay and costs incurred in identifying the bullion held in the Trust's allocated gold account."

So, if a custodian or subcustodian becomes insolvent, and since the gold they hold is not likely specifically designated for the GLD trust account, all the gold they possess will be used to satisfy all the debts of that custodian, and not just the debt owed to the GLD trust account.

So this now brings me to the discussion of what happens in the event of default of the custodian or the ETF entity itself.

In the event of a default of the trust in which the gold is held, one becomes an unsecured creditor of the trust. That means that the trust will likely be required to liquidate its positions in the metals, and satisfy the unsecured obligations of the trust, usually at pennies on the dollar.

None of the gold being held in trust within the GLD is designated to each holder of shares on an individual basis. Therefore, all the owners of the GLD have equal rights to all the gold being held in trust. So, if there is not sufficient gold to satisfy all rights to that collective gold, all the owners are subject to a pro-rata reduction in their ownership interest in the total gold being actually held and on hand.

When you invest in gold, don't you want to assure yourself of having an asset which retains some amount of value? However, when you place your money into these ETF's, not only is one not protected in the manner in which they initially expected when investing in metals - as they have no ownership of actual gold - but one now is even in a worse off position since the amount of money they invested may only be returned to them at pennies on the dollar in the event of a default.

It is quite unfortunate that most of those that buy shares of the GLD believe that they have an ownership in a gold investment vehicle, which is assumed to be a safe alternative to actually owning gold itself. While I have not even delved into all the issues I have identified in the prospectus, I seriously hope that this has at least brought to light that this is far from the truth.

Personally, I only view GLD and SLV as trading vehicles and would never have more than 1-3% of the total amount I have designated for investment into metals placed into these tenuous vehicles.

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