Tuesday, October 12, 2010

Relationship of "ForeclosureGate" and Type of Ownership of Precious Metals

When a mainstream reporter, Diana Olick, of CNBC, reports some disturbing and scary informed speculation about what may happen regarding the foreclosure situation, in today's piece titled Foreclosure Fraud: It's Worse Than You Think, one has to worry about the care that large financial institutions have given to their legal responsibilities.

The entire MERS-related structure has been questioned and has been the subject of suits.

Of course it is public knowledge that the finances of Big Finance are murky, given extensive difficult-to-value assets.

None of that is any of my specific interest, given that I sold all my financial stocks in winter/spring 2007 and paid them little attention except from the short side in 2008-winter 2009, and then did one quick trade on Wells Fargo from the long side this year (a winner, at much higher prices than today's).

What concerns me as a precious metals investor is that I have read the GLD and SGOL prospectuses more than once for each. The custodians and other major players in these entities that hold physical gold are all Big Finance companies. The prospectus for each entity is replete with all the things that can go wrong with the chain of custody of the metals. They also make clear that if some metal goes missing or is impure, investors have few protections.

The metals may have subcustodians, which themselves may have subcustodians, and these entities may lie/cheat/steal, or otherwise screw up, without the investor being able to recover damages.

Thus I am happier owning the Canadian trusts to own physical gold without actually owning the gold. The stock symbols are GTU and PHYS. Their prospectuses disclose where the gold is; there is no subcustodian. At least in the case of GTU (Central Gold Trust, run by the same team that runs CEF, the Central Fund of Canada), the directors do not even carry insurance.

Right now, the premia over NAV for GTU and PHYS are at historically low levels. This along with the slow ramp-up in assets in the Rydex SGI Precious Metals mutual fund and the utter lack of speculative froth in Newmont, Goldcorp and Barrick suggest to me that the strong bull market in gold is the most apathetic one from the public's standpoint I have ever seen in any major asset class.

Whither gold prices?

The investment guru Bill Fleckenstein somehow delivered outstanding results from his short-selling hedge fund that he started "too soon" before the stock bubble was close to peaking in the late 1990s. He brilliantly closed it right near the bottom of the bear market almost two years ago and basically became a precious metals investor in his new fund.

He wrote a column several months ago in which he only half-jokingly said that by the time the top of the gold bull market would be seen, Big Finance would have embraced the trend so much that it would be promoting all sorts of investment vehicles in precious metals and would be taking large investors to tours of out-of-the-way mining sites.

Perhaps that has now begun. Goldman Sachs is now out with a bullish upgrade on gold and silver prices. Price targets for one year from now are $1650 for gold and $27.60 for silver.

Maybe it's just wishful thinking, but maybe, just maybe, the idea of anchoring the money supply with a metal that would take away from the Fed the ability to centrally plan the money supply of a continental country (and then some) is gaining ground.

In the here and now, gold and silver prices are both extended and ripe for profit-taking at the very least. Looking one year ahead and applying the "Elfenbein rule", the Goldman price projection for gold appears quite reasonable.

Given the continued upside price potential in concert with the safe-haven reasons I invest in gold, I want to be as confident as possible that the gold in the fund I own is actually "there" and not mishandled, as it appears the documentation surrounding mortgages often became. Thus I trade away the liquidity advantage of GLD and other Big-Finance-custodied gold funds for the much less tradeable GTU and the more liquid PHYS.

Copyright (C) Long Lake LLC 2010

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