One of the hallmarks of a great business plan is one that provides a product to meet a clear, present, and significant need! Although far-fetched and not realty-based, here is a compelling example of such a product:
Assume that a particularly virulent strain of bacteria has suddenly attacked tens of thousands of people within a particular state or country and appears life threatening. If a pharmaceutical company has just completed the development of a new, super anti-biotic that, upon testing, shows a cure rate among those patients of 95% — that drug would be the perfect product to meet this urgent need!
Let me emphasize that the investment “need” I have in mind today pales in comparison to any human need that is life threatening. However, this particular need does receive a lot of attention in the financial press and is frequently on the minds of investors within the precious metals markets!
This need is at once simple and complex: can we trust the currently available instruments through which an investment in Gold can be made? The World Gold Council goes out of its way to reassure investors that the Gold market is extremely “liquid”, including the publication of charts such as this:
We also know from ETF.com that the SPDR Gold Trust (GLD) ETF is perennially among the top ten biggest ETFs.
Additionally, according to YahooFinance.com, the average daily volume in GLD over 3 months has been in the 8 million range. Therefore, we can see that the market is huge, highly visible, and very liquid.
Alas, here is where any conversation about Gold inevitably diverges along one of two paths:
1) “Isn’t it great that investors have such a liquid market through which to invest in Gold!” or
2) “Beware the Gold market, because some really fishy things are going on!”
Of course, most of the “mainline” financial press promotes the view expressed in 1) above, and casts a deprecating eye upon those who have come to adopt the perspective summarized in 2) above! In fact, those who tout the more cautious, suspicious view regarding Gold are quite often dubbed “conspiracy believers” (as though a financial conspiracy is inconceivable in our contemporary, regulated world)!
Need I remind us of the noxious reality laid bare through multiple scandals – including the following:
1) The monumental LIBOR scandal;
2) The 2012 fine of $25 billion assessed by the U.S. Government on five large U.S. banks for foreclosure processing abuses;
3) The 2013 fine of $9.3 billion assessed on 13 U.S. banks for foreclosure abuses;
4) The $410 million that J.P. Morgan Chase (JPM) had to pay in fines for manipulation of the Electricity market (2013).
The list could go on. But we need to push ahead!
When we focus upon the Gold market, there have been enough strange, seemingly incongruous developments during the past couple of years that it does not take a Sherlock Holmes to realize that things just “don’t add up”! One long-time market professional, Eric Sprott, is particularly worthy of our attention regarding Gold – since he is a 45-year veteran of the financial and investment world and has managed his own securities firm since the 1980’s.
Let’s briefly highlight Sprott’s primary observations about Gold:
1) Sprott has been consistently vocal about what he calls the “Chinese Gold Vortex”.
a) To oversimplify, Sprott and his staff have meticulously researched, compiled, and analyzed industry, government, and public data related to the amount of global Gold exported, imported, mined, recycled, and/or freed up following net redemptions from Gold ETFs.
b) Based upon matching up these various “Gold flows”, it is apparent to Sprott that the numbers (literally) “don’t add up”!
c) The most obvious focus of his analysis is China and India – generally the nations that record the greatest demand for physical gold.
i) Sprott has demonstrated that Chinese demand (imports) during 2013 exceeded the aggregate Gold supply available from the sources listed earlier.
ii) This aberration … a total disconnect between Gold supply and demand fundamentals vis-à-vis the market price of Gold, presents the specter of some sort of market manipulation.
iii) It is that aberration which inspired Sprott to create the term: “Chinese Gold Vortex”.
d) Review this chart from Sprott:
The far right column summarizes the monthly average of Chinese Gold imports through all of 2013: 143 tonnes.
The column just to the left of that column shows the monthly average of imports during the first two months of 2014 (much higher)!
e) I vividly recall throughout 2013 wondering why/how the price of Gold was steadily (sometimes steeply) declining, while the demand for physical Gold (and pricing for physical Gold) was rising. You’ll remember that there were actual “shortages” of the physical metal.
2) Sprott suggests the intriguing (and controversial) theory that one of the major suppliers of the “mystery” Gold exported to China (and other Asian countries) is the U.S. Government. All sorts of theories have been suggested as to “why” this type of exporting would be executed – virtually all of which hint at market manipulation.
3) Putting theories and speculation behind us, consider some other current “indicators” that the Gold market is not quite as balanced, transparent, and equitable as one would hope:
a) On March 3, 2014, five banks at the apex of London's Gold trade were sued in New York federal district for manipulating prices.
i) Sprott adds that about twenty firms showed up in court earlier this year to push for inclusion within that class-action lawsuit.
ii) With enough corporate power behind the effort, the court might succeed in pushing some intriguing transparency into what has evidently been (thus far) a dysfunctional and opaque process!
iii) Once the court orders sufficient disclosure of market data, Sprott hopes he will be able to peruse key records and discover, for instance, who sold 100 percent of the annual supply of silver in one day and 50 percent of the gold supply in one day.
iv) Sprott reports that the German regulator, BaFin, has suggested that Gold manipulation holds the potential of being worse than LIBOR.
v) Building on that thought, a report from British consultancy, Fideres, has asserted the gripping possibility that “global gold prices may have been manipulated 50% of the time between January 2010 and December 2013”.
vi) I draw your attention once again to last year (2013), as demand for physical gold heated up – including 336 tonnes of purchases between April and June! Someone (central bankers, perhaps) persuaded the Reserve Bank of India to slap on a slew of new rules intended to bring buying to a dead stop! (Demand shrank by 75%!)
b) Perhaps strangest of all, consider these story about Germany and its Gold:
i) In 2012, a German federal court issued a ruling that the Bundesbank should conduct an annual audit and (and physical inspection) of its global Gold reserves (including that stored at the Federal Reserve Bank of New York).
ii) In October of 2013, the Fed refused to submit to an audit of the Gold it holds for Germany. Evidently, for many decades, the Fed has gotten by through written confirmation to German authorities regarding its Gold. In fact, that is exactly why the Court ruled that an audit and inspection was in order!
iii) As one might hope, by January of this year, the Bundesbank declared that it wants 50% of its Gold back by 2020 (ie. it wants 150 tons back!) Think about that folks! One of our strongest world allies wants its Gold back, and to meet its deadline, we need to return an average of 3.6 tons/month!
a. So how much have we returned so far? Five tons!
b. “Curiouser and curiouser”
There it is! That is your background on the Gold market and the “Chinese Gold Vortex”. It makes Gold investing a bit more of an adventure, doesn’t it!?
If you invest in Gold, what is your preferred way of trading it: 1) Futures; 2) Options on Futures; 3) coins; 4) mutual funds; 5) mining stocks; or 6) ETFs?
If the latter, do you own GLD? That ETF is a “trust” sponsored by the World Gold Council (it oversees the GLD trustee – Bank of New York Mellon (BK)). So if you own GLD, don’t worry about manipulation or any lack of transparency. ETFs are required to be totally “transparent” on a daily basis! And the assurances we receive that GLD has sufficient bullion Gold within the HSBC vaults in London to accurately, reliably represent proportionate Gold “ownership” among all of its shareholders is at least as convincing and authoritative as the annual letter the Fed sends to officials in Germany about its Gold!!!
What did I just say? Something sounded fishy, didn’t it? The folks who run GLD do not care for thorough audits of its Gold holdings any more than do the folks at the Fed!
But that isn’t the only interesting “wrinkle” about GLD! Wouldn’t you think that, if GLD serves as a trust representing ownership of physical Gold, a shareholder could surrender her/his shares in return for some physical Gold?
Well, yes, you could expect that! And you could actually receive physical Gold in return for shares… if, that is, you turn in a minimum of 100,000 shares (way over $10 million) and you are an authorized participant!!
Finally (and not insignificantly) there is a “Force Majeure” clause within the GLD prospectus that leaves the trust an “out” if/when market conditions make it too challenging for it to back up its outstanding liabilities (represented through its shares outstanding). I do not pretend to be a lawyer, but let’s just imagine (in theory) that the price of Gold skyrockets over the course of a few days and moves up by 35%. If the trust did not actually own sufficient Gold to back up all its outstanding shares, it would have a serious challenge – wouldn’t it?!
This brings us full circle to the very beginning of this article! A product that addresses a widespread and compelling need! With regard to investing in Gold, a new product emerged in mid-May that rises head and shoulders above others with regard to addressing most (if not all) of the concerns to which I have referred above!
The new product is the MERK GOLD TRUST ETF (OUNZ).
The creator of OUNZ is Axel Merk, an exceptionally bright, insightful man who founded his own investment firm (Merk Investments LLC) in Switzerland during 1994, moving it to California in 2001. He earned a BA in Economics at Brown University, then went on to receive a MS in Computer Science at Brown, before travelling to carry out post-grad research at the Imperial College in London. In particular, he is an expert within “strategic currency investing” – a strategy that (in his mind) includes Gold and other key precious metals and can provide invaluable portfolio diversification! He authored the 2009 book: Sustainable Wealth: Achieve Financial Security in a Volatile World of Debt and Consumption.
What exactly distinguishes OUNZ from GLD? Here is a great explanation from Merk himself:
“As a large gold investor ourselves in our Merk Hard Currency Fund, we wanted a better way to hold gold. Having studied perceived deficiencies of other gold ETFs, we devised the Trust’s Guiding Principles (available in the Prospectus and at www.merkgold.com) as the philosophy upon which we built the Merk Gold Trust. By creating an open-end exchange-traded product, we make OUNZ available to all investors. Even if investors currently don’t plan to take advantage of the opportunity to exchange their shares for gold, investors may appreciate that they have the option to take delivery of their gold should they change their mind. To serve investors in OUNZ, we have created a highly scalable and robust delivery process. We are thrilled to announce that the U.S. Patent Office agrees that our process is truly innovative by granting a patent on the delivery process.”
Anyone who buys OUNZ can be assured that there is physical Gold backing up her/his shares! Why do I say that? Because Mr. Merk and his ETF have put themselves on the hook to deliver actual Gold to you at whatever time you may choose to exchange your ETF shares for the physical metal!
You heard me correctly! You don’t need to be JP Morgan Chase or Goldman Sachs, and you don’t need 100,000 shares! The minimum for redemption in Gold is just 100 shares! Pretty cool, eh?! Take that, GLD!
Now, as you surely must expect – there really isn’t any “free lunch”. Those who choose to redeem shares for Gold will need to pay a fee (see the prospectus for details). But if you have enough shares to exchange them straight up for one “London Good Delivery Bar” – it will only cost you $32!
So, this “middle ground” between owning and storing Gold coins/bars at home and owning essentially “paper Gold” (through GLD) isn’t entirely “perfect”. But I think it is safe to say that it is a vast improvement vis-à-vis current our choices. Consider this strategy for accumulating Gold over time:
1) If you think you want to accumulate Gold, but are unsure of “how”, you can buy OUNZ, knowing that it will be convertible if/when you choose to do so (meanwhile, no storage fees!);
2) You can keep building your ownership stake until you feel you have “enough” to make being responsible for “self-storage” more economical;
3) You could (of course) accumulate a “Gold stake” via GLD, but when you want to switch to owning physical Gold, you’d have to sell GLD and use the proceeds to buy physical coins or bullion… and that will precipitate a “taxable event” at the 28% tax rate (“Collectible” tax rate category). That’s pretty steep!
However, when you want to switch from OUNZ to physical Gold… guess what!? The shares you possess already represent actual Gold ownership!! So the Gold you finally receive will actually already be yours! Therefore, there is no taxable event! What a deal!
In light of all of the above, I think you can agree with me that Mr. Merk is not just blowing smoke when he says:
“We believe we have revolutionized commodity investing by bridging the world between institutional and individual investors. Gold investing will never be the same, as investors may now buy gold with the ease of an ETF, but also have the option to take delivery of their gold when they want, where they want, in the form they want!”
Whenever you invest, and within any financial instrument that you buy or sell, (please) always ensure that you know both the pros and cons of that investment! [Always!] We do not live in a perfect world. And we absolutely do not live in a manipulation-free, misrepresentation-free, totally transparent financial environment! Too many financial powers (and/or individuals) want “a piece” of your money!
Remember one of my most basic axioms of financial management: No one will care as much about the proper stewardship of your financial assets as you do! Carefully screen anyone/everyone to whom you grant authority to trade on your behalf or move assets for you.
That being said, and despite the “JP Morgan Chases”, the Fed, and the “Gold fixers” of the world, Gold is a proven investment choice. Buying it is not always a great idea (such as late in 2011 when it pushed briefly over $1,900/oz.); however, over time, it has been a better “store of value” than paper currency.
Therefore, over time, accumulating Gold may be an appropriate choice for many of our readers.
If you fit in that category, and your initial investment capital (and resources) do not make a current purchase of Gold bars or coins very practical, OUNZ may be an excellent choice through which to accumulate the right to receive physical Gold … tens of shares or hundreds of shares at a time!
Two final notes:
1) I rarely write about a new, as yet unproven, investment product. It is much better to wait until the ETF or fund or company has developed a track record! However, I feel that OUNZ is a special case. It uses a standard, time-tested “trust” structure; it invests in Gold; it comes from a firm with a long track record within the currency (both hard and soft) markets! Finally, OUNZ is specifically designed to address many of the concerns about Gold investing that I have heard voiced by members of the Market Tamer family!
That being said: any new fund will suffer from relatively low trading volume – which means lower liquidity and higher bid-ask spreads. Therefore, always enter “Limit” orders when buying or selling OUNZ. You’ll be glad you did!
2) Regarding relative fees charged for the receipt of physical Gold by OUNZ versus your friendly neighborhood (or internet-based) Gold dealer (through whom you can buy or sell Gold). As you can see in the chart below, the fees charged by OUNZ fall in the range of those charged by dealers.
In any event, if you want greater certainty that the Gold “is there”, and you want to actually exchange shares for physical Gold – OUNZ clearly trumps GLD.
DISCLOSURE: I own GLD and GDX, as well as physical gold coins. However, I am proud to say that I don’t own JPM! Nothing in this article is intended as a recommendation to buy or sell anything. Always consult with your financial advisor regarding changes in your portfolio – either subtractions or additions.
 He even has a business school in Canada named after him!
 Mr. Sprott’s IQ may here have super ceded his understanding of how to communicate in crystal clear fashion with the average person. For example, here is the definition of “Vortex”: “In fluid dynamics, a vortex is a region within a fluid where the flow is mostly a spinning motion about an imaginary axis, straight or curved. That motion pattern is called a vortical flow.” Perhaps “Chinese Gold Mystery” would have created a more vivid image and understanding among his readers!
 One of the most popular theories holds that U.S. “Bullion Banks” needed the price of Gold to decrease because they were (deeply) net short Gold.
 The class-action suit was filed by US gold futures and options trader, Kevin Maher, against Bank of Nova Scotia, Barclays Bank, Deutsche Bank, HSBC, and Societe Generale – each of which participates in setting the “London Gold Fix” (a twice-daily benchmark price used as a reference for trade in gold and gold derivatives).
The suit alleges that since at least 2004 the banks worked together to manipulate the prices of gold and gold derivatives contracts.
 Sprott suggests that: “where there is smoke, there is fire”.
 Not exactly a novel concept…. And absolutely a policy that reflects “Best Practices”.
 Excuse me, but that is as absurd as me (former CFO) presenting a letter to my Board of Directors saying: “Trust my, folks. All the real property, securities, and cash is just as it is supposed to be. No need to have anyone else check on it for you!”
 A literary reference to Alice in Wonderland.
 State Street Advisors is involved as the marketer of GLD.
 “Tom Petty” does not appear among the list of authorized participants… only firms such as JP Morgan Chase, Bank of American, Morgan Stanley, Goldman Sachs, etc.! “Curiouser and curiosier”, indeed!
 You choose the reason – outbreak of a major war; insolvency of a major developed country; etc.
 The CME declared a “Force Majeure” event back in November of 2012 with regard to Gold (specifically in New York City).
 I would never, ever suggest that a degree from Brown University certifies one as extremely bright – but I am a 1971 graduate myself!
 It is hard to imagine better timing for the publication of a book on that topic!
 For exchanges of over 50 ounces, shipping and insurance to the U.S. are covered… free!
 As you can see, you can trade shares for coins, but it is more expensive and includes a “minimum” fee! In the real market, these fees reflect the “convenience fee” for coins vis-à-vis bars!!
 How can I say there is more certainty regarding the backing of OUNZ through bullion — Merk’s company has made it so easy to exchange shares for Gold that if the ETF ever failed to deliver, it would be huge news, ruin Merk’s reputation, and undoubtedly result in lawsuits. The Gold will be there.
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