Ok, so from the 3rd quarter 2008 to the 3rd quarter 2009, gold increased from $900 to $1050, yet during the same time, demand for gold DECREASED 35%. This seems to be in direct contravention to the laws of supply and demand. This chart is telling:
During this time, the demand from ETF's dropped 72%, a stunning amount, even as new investors continue to flock to the product. There is only one conclusion to draw from this. People are pumping dollars into the bullion ETFs to take advantage of the uptrend in PM's, but those dollars aren't being passed on to owners of actual bullion. As the number of shares of GLD issued is increasing, they are buying less and less actual gold. The recent sell off in gold has not been fully reflected in physical prices, as premiums have skyrocketed $42 in the past month.
This points to a rather nasty conclusion. GLD is using money from new investors to pay off those cashing out of the fund rather than making new purchases of bullion. Thinking back, it makes sense. Remember, GLD charges ridiculously low fees, only 0.4%, all of which goes toward management, spending no money on storage. This is often a feature of Ponzi schemes, as they take their profits from the principle rather than fees.
The really innovative part of this is that they don't have to produce the extraordinary returns that are normally featured in Ponzi schemes, but rather have the incentive of being an "easy" way to get exposure to a rapidly appreciating commodity. Another feature is that they make redemptions especially difficult. You have to cash out something like twenty million dollars worth of bullion in order to take physical delivery. Those few who cashed out of the fund could have easily been paid out with funds from newer investors (rather than funds obtained from selling gold on the open market).
Another feature common to Ponzi schemes is secrecy, and GLD has that in spades. Generally, the secrecy relates to how the investments are made, with a somewhat vague, jargon filled description being all that is given. In this case, they claim to be purchasing and storing gold (somehow for almost free), but the system by which they do so is complex and secretive. Complexity breeds high costs, but in this case, they manage to do it for only 0.4%, including administrative costs.
This is going to end in tears for a lot of people.
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