GLD ETF Mechanics 101 (Updated x2)

We have an automated download for the GLD Serial Bar list as part of the database project, and when today's file didn't get processed I went to see what the reason was. Somehow, the normal bar list was replaced with an internal fax. For the last 30 hours, it has been sitting at the following location:

[Update November 2012 - to anyone using this link from Scissorspaperockstar's post on TFMetalsReport, please be aware that this fax (in my opinion) does not prove Andrew Maquire's interpretation of GLD+SLV mechanics, and this article does not attempt to address that particular area. regards, Warren]

[Update x 2 November 2012 - recommended read is THIS PIECE by Bron Suchecki of the Perth Mint, which addresses Andrew Maquire's argument head-on !!!
plus, additional personal perspective post-analysis:


[[ *** another update - the PDF issue on the spdrgoldshares site seems to have been resolved. This link now shows the normal PDF bar list, which is regular. ]]
And I assume the HSBC custodians will fix it up once they realise they screwed up, but in the meantime let's have a look at the contents. Please note that even though the fax is an internal fax, I am placing a copy here on the grounds that it has been exposed publicly to the entire world (at the above URL) for more than 24 hours - but I will take it down if asked by a HSBC representative. I have blurred out the phone numbers, but until they replace the file, it's accessible by anyone (they'll want to change their letterhead after this incident too).

The fax highlights some of the boring mundane mechanics of how the bullion banks operate (yep, no conspiracy here folks).

This is basically how the banks can get gold so quickly - essentially a bunch of ledger entries.

In basic terms (confirmed by precious metals experts), the 'de-allocated' means converted to allocated unallocated ... HSBC takes control of (title to) 1907 physical bars* and gives 759,618.457 oz to the trust's unallocated account. So then, the 759,618.457 oz of unallocated are are effectively 100% backed by the 1907 bars. Then the trust is able to transfer (from the unallocated account) a total of 759,562.242 oz to the three Authorised Participants (AP), leaving 299.086 oz in the trusts unallocated account. Note that the balance here is treated to handle whatever rounding error is required on the day - the difference (addition) on the 16th is 59.215 oz, so the balance from the previous day must have been 239.871 oz).

The transfers to the three APs in the document may have been to the APs account with HSBC (in which case the 759,562.242oz in those 3x unallocated accounts are 100% physically backed - hooray) or maybe to the APs accounts with other bullion banks (in which case HSBC has a clearing balance with those bullion banks through **).

At this point the unallocated bars become part of the bullion banking system, liabilities and the rest - the mechanics I'm still a bit hazy on despite having had a lot of stuff explained to me. The main point (for me) is that the 1907 bar entries involved will have been removed from the GLD bar listing (which is a spread sheet), and that the gold bars themselves didn't necessarily have to leave the vault at all. Which is a good thing since the amount is about 21 tonnes of gold. I will have more to say about this in another article.

It's a really interesting insight and thank you HSBC for making that file available to the public. Take it with a grain of salt since it could have just been a very deliberate plant since one must assume these kind of mistakes don't happen by accident, but then it looks like a genuine screw up.

* which previously would have been part of the normal GLD shares system.
** according to my industry contact.

---- edited for Clarity - Kid Dynamite (comment #2 below) is correct, in the above sentence I got my allocated/unallocated mixed up, was a little late at night and I was rushing.
It is also worth noting that FOFOA has written a note (last half of that post, below the videos) about the GLD outflow (which was kind of a big movement of gold) - with a reference to Lance Lewis' GLD puke indicator, with the theory of the outflows being in a quasi correlation to the movements of FIAT pricing of gold. That is one avenue for the database that I'm interested in identifying - seeing if there is a way to predict paper gold price based on bar movements (but I think it would be way too complex).
As for the bars themselves, I will be looking at the data interested to see whether these same bars flow back into GLD holdings again soon. @GM - yes I haven't completely handed in my conspiracy badge just yet - but you're right I have been approaching this with an 'innocent until proven guilty' standpoint. I'm fascinated by these mechanics of wealth movement, where a single page of GLD entries represents more wealth than I'll see in the next 10 years.
This of course gets us into a whole new area of research - basically whether those serial number entries are fictitious or real. That is the key, since the entries themselves represent the gold and are TREATED AS money and wealth. But more on this in another article :)


Kid Dynamite said...

wow - this is a COLOSSAL screwup that they posted this - great catch, Warren. As you noted, though, it's not a big deal, and you can confirm the numbers with what's in the GLD historical archive spreadsheet on their website: these are the redemptions from one day (aug 10th --> Aug 11th)

this goes hand in hand with your prior post about Sprott's delivery. If Sprott had a vault in London, he could get mass quantities quickly as well.

Kid Dynamite said...

also, Warren, I think that "the 'de-allocated' means converted to allocated" is confusing and misleading. What's happening here is that gold is coming out of GLD's allocated account holdings. it's being de-allocated.... and delivered to the APs... right?

GM Jenkins said...

Take it with a grain of salt since it could have just been a very deliberate plant since one must assume these kind of mistakes don't happen by accident, but then it looks like a genuine screw up.
Yeah, it's hard to imagine that being a plant, but I'm happy to see you're not too quick to throw off your conspiratorial cap. I don't think you should operate under the assumption that GLD and SLV are innocent until proven guilty. Just the opposite, in fact. Everything in context. Remember, a coup d'etat has occurred in America, wherein the very banks listed on that fax pretty much work for and with the government in a quasi-fascist quid pro quo arrangement, so it seems to me that your provisional but operating hypothesis has to be that the task of "profitable PM-mania prevention" has been farmed out to those self-same firms. Their heavy involvement with these byzantine ETF's is itself a clue. But because we aren't dealing with dumb government workers here but rather above-avg IQ bankers, you can expect that they won't too easily leave smoking guns lying around, and that any official paperwork (like this) should be expected to appear strictly legitimate.

Louis Cypher said...

Pretty cool Warren. Now I have a template to send to the warehouse to get them to send me a few tons :)

Warren James said...

@ Louis, your theory about the PDF being a public message might hold water. While ZeroHedge is crying for the blood of JP Morgan, there is no issue really if JP Morgan just got a bunch of gold from GLD, and evidence of the internal transaction was made public - it's a bit like showing someone a copy of your ATM transaction receipt to prove that you just withdrew some FRN's to pay someone back with. I'll now go with the view that the 'mistake' was deliberate.

Why? not sure. FOFOA (who linked to my article :) points out the outflow is also similar to the size of South Korea's recent purchase. Either way, it's interesting that physical gold is on the move.

Louis Cypher said...

This is also part of the problem I have with Martins last essay. Sure the US Treasury market is the biggest in the world but he who panics first and all that. Pimco panicked and got out.
The smaller central banks seem to be slowly panicking and seem to be using their US treasuries in much the same way as private Europeans were using the Dollar as a means of holding Gold until Nixon closed the window. Now they have no choice but to dive right into Gold without a proxy. Too big to fail is now synonymous with too big to trade and future bag holder. If this continues GLD will be picked clean.