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Wednesday, May 11, 2011

When Will GLD Or SLV Default?

If you read the fine print of the GLD or SLV fund prospectus, they fund manager is allowed to lend the fund holdings to short sellers. In effect, the GLD and SLV fund manager is secretly practicing fractional reserve banking.

In this post, I only specifically mention GLD and SLV, because they're the largest gold and silver funds. Even funds that claim to have "full reserves" are suspect (like PHYS). Unless you inspect the vault, you can't be sure that the fund manager has all the metal he claims to have.

GLD and SLV are a variation of the classic fractional reserve banking scam. Shares of GLD and SLV represent a "demand deposit" for gold or silver. At any time, the shareholder may sell his shares for the NAV. However, only "designated market makers" may redeem shares of GLD or SLV for physical metal or futures. The fund manager doesn't keep as much gold/silver in his vault as there are shares of GLD/SLV. In other words, he's practicing fractional reserve banking.

As long as all shareholders don't simultaneuosly sell, the fractional reserve scam continues. Like any Ponzi scam, a continuous supply of buyers helps prolong it. As long as more people buy GLD and SLV than sell, a default cannot occur. The GLD/SLV fund manager is counting on the fact that all shareholders won't simultaneously sell, just like a classic fractional reserve bank counts on the fact that all demand deposits aren't simultaneously withdrawn.

Given that GLD and SLV are practicing fractional reserve banking, an eventual default is guaranteed. It's not a question of if, but when, the default will occur.

Imagine the following headline:

There was a default in the gold leasing market. The GLD fund was stuck with a loss of 10%. According to the fund's prospectus, that 10% loss is passed on to shareholders.
What would happen? After that default, people would sell their GLD and buy physical metal. That would lead to a run on *ALL* PM funds, and not just the one that defaulted. After a default, it'd be obvious to any fool that GLD and SLV are a scam.

State insiders are eager to avoid this. They want to preserve the illusion that State paper investments are sound. Therefore, GLD would probably get a bailout, either explicitly or indirectly.

GLD and SLV shareholders do not have the right to redeem for physical metal. They only have the right to redeem for paper. If necessary, insiders will print enough paper to bail out the fund. That would be more attractive than a default, which would cause people to switch from paper to physical metal, taking actual delivery.

GLD and SLV are secretly practicing fractional reserve banking. They are lending out their metal to short sellers. This guarantees an eventual default. However, a default would cause people to switch from paper metal to actual metal. Therefore, the fund would be bailed out, explicitly or secretly. After all, fund shareholders are merely promised paper, and not actual metal. Therefore, a default by GLD or SLV or another large PM fund is logically equivalent to the complete collapse of the State financial system.

An eventual default is guaranteed. That applies to GLD and SLV and all PM funds. However, that default will occur around the same time that the State financial system scam completely collapses. Until then, those funds are "too big to fail" and will get a bailout.


Little Bird said...

FSK, did you know that some states have done or are in the process of passing laws requiring government ID be checked and recorded, and all sales and purchases of gold, silver and other precious metals be reported to law enforcement within 24 hrs with the amount, id numbers, address and description of the purchaser? They are saying that metal dealers who don't comply will this be arrested.

The excuse is to track stolen goods. Well why not require everything have these checks. Obvious BS since the police pretty much refuse to investigate theft. This is about making a list of who has metals so they can be confiscated.

Little Bird said...

Here's one of the model laws. This was passed in 2009. It was promoted at the time for being about copper theft, now it is being used to require state ID and 24 hr reporting of all coin sales. No one is talking about this.

By Fincher
AN ACT to amend Tennessee Code Annotated, Title 38,
Chapter 1, Part 2, relative to scrap metal and
jewelry dealers.
SECTION 1. Tennessee Code Annotated, Section 38-1-202, is amended by deleting
subsection (b) in its entirety and substituting instead the following new subsections:
(b) No person acting as a buyer or dealer under this section shall purchase any
item covered by this section from a person under eighteen (18) years of age, nor accept
any item covered by this section from anyone who appears intoxicated, nor from any
person known to the person to be a thief, or to have been convicted of larceny, burglary
or robbery, without first notifying a police officer. Any person acting as a buyer or dealer
under the provisions of this section shall exercise due care to comply with the provisions
of this section.
(c) No person acting as a buyer or dealer under the provisions of this section
shall take any item covered by this section under a buy-sell agreement, when the article
is known to the person to be stolen.
SECTION 2. Tennessee Code Annotated, Section 38-1-203, is amended by deleting the
section in its entirety and substituting instead the following:
(a) Every person or corporation dealing in the items described in § 38-1-201 shall
keep a log in duplicate and shall enter on the log:
(1) A clear and accurate description of any items of jewelry or precious
metals purchased including, if applicable:
(A) Brand name;
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(B) Model number;
(C) Serial number, if issued by the manufacturer and not
intentionally defaced, altered or removed;
(D) Size;
(E) Color, as apparent to the untrained eye, not applicable to
(F) Precious metal type, content and weight, if indicated;
(G) Gemstone description, including the number of stones; and
(H) Any other unique identifying marks, numbers, names or
(2) Information on the seller, including: the name, race, sex, height,
weight, date of birth, residence address and numbers from the items used as
identification. Acceptable items of identification are one (1) of the following
(A) A state-issued driver license;
(B) A state-issued identification card;
(C) A passport;
(D) A valid military identification;
(E) A nonresident alien border crossing card;
(F) A resident alien border crossing card; or
(G) A United States immigration and naturalization service
identification; and
(3) The date and amount of money paid for such items.
(b) The seller and the purchaser shall sign the log below the description of each
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(c) On each day the purchaser shall transact business of the type described
within this section, the purchaser shall deliver to the sheriff and the chief of police of
each county or municipality in which the business is conducted a copy of the log
concerning that day's business, and the copy of the log shall be delivered by twelve
o'clock (12:00) noon of the day following the date of the transaction. The book shall be
carefully preserved without alteration and shall at all times be open to the inspection of
the sheriff of the county and the chief of police or any deputy or police officer of the city
or county.
SECTION 3. Tennessee Code Annotated, Title 38, Chapter 1, Part 2, is amended by
adding the following language as a new section:
§ 38-1-205.
(a) When any person sells property to a buyer or dealer subject to § 38-1-201,
the buyer or dealer shall obtain and record the information provided for in § 38-1-203
and obtain a statement of the seller that the seller is the lawful owner of the item, and
have the record signed by the seller. This record shall be made available to any law
enforcement agency or officer upon request.

FSK said...

There is a similar law in NYC. You must show ID *OR* the seller is required to charge sales tax.

A gold/silver/FRN barter network is a great agorist business idea. The more stupid laws State thugs pass, the greater business opportunities exist for agorists.

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