Gold and the Fine Print

We here at Bullion Trading LLC would like to bring a story to your attention.  SPDR Trust, also known as GLD, which is one of the most popular and active funds used by for gold trading.  GLD is popular for having low fees and $69 billion in assets.  Yet now there is talk surrounding GLD and possible scam accusations from individual investors.  And so, now the fund’s prospectus is under close scrutiny, with certain language and choice of words being investigated.

The prospectus makes a number of statements that will surely raise a few eyebrows, starting the claim that any bullionfound in the vaults that do not “meet the standards of the vault it is stored in” will be written off as a loss to the investor.  So is GLD storing bars of counterfeit gold, fully aware of this deception, with the intention of not officially “discovering” the forgery until after the time of purchase?  Is so, it begs the larger question of whether or not GLD actually owns any physical gold to begin with or if it is all simply “paper gold” that they are to customers.  The prospectus also states that GLD does not oversee the actions of their sub-custodians, and if those sub-custodians were to commit theft from the fund, any legal action against them would be very limited.  Imagine if there was a bank that offered to store your finances but could not be held liable if those finances were then tampered with by either their employees or some other middleman you don’t even know.  Not only would you not trust such a bank, but they would be a contradiction of the very definition that we hold banks to be.

But the smoking gun is a short passage in the prospectus that flat-out forbids trustees from being able to visit the vault and see the physical gold they have purchased.  The reasoning behind this is that the fund wishes to avoid having visitors or have to expose their precious assets to strangers, which is a fair concern, but the poor choice of wording is definite cause for alarm and raises a number of red flags.  There is a famous quote by the late political commentator Christopher Hitchens: “That which is asserted without evidence can also be dismissed without evidence.”  To apply that statement to this example: if a merchant asserts they have sold you gold but cannot produce the item, then there is no difference between them and someone who never had any to begin with.

This is not to say that we are making any direct accusation at GLD; in fact, as a fellow participant in bullion trading, we understand the large number of risks involved and why merchants will want to use wording that protects themselves at all times.  We also acknowledge that for a $68 billion operation to be a scam would be a rather extreme conspiracy.  But the bottom-line is that we at Bullion Trading LLC advise all investors out there to always exercise caution and be willing to overanalyze every bit of fine print on any prospectus.  Again, this is why it’s always important to do the necessary research before the time of trade, whether you are the dealer or the customer.

One nice advantage about Bullion Trading LLC is that our rules of conduct are almost the polar opposite of GLD’s; we like the customer to be physically present at the time of their purchase and encourage them to inspect the gold themselves, which they can then carry on them when they leave.  And while we do not parade the gold in our vault out to strangers for obvious reasons, we make it no secret what our business is, and we are certainly happy to discuss our bullion with anyone who comes in.  This is why once again a trusted bullion dealer is a great place for a new to start before moving on to any major trust fund.  As for GLD, their situation should give us all pause.  If nothing else comes out of this news story, at least it will motivate investors to start reading the prospectus a little more closely.