Facts: The Enemy of The Precious Metals Blogger

A few weeks ago I wrote this post where I clearly explained what was factually incorrect about claims made by a typical post from a precious metals blogger, and how ignorance of these facts is used to mislead readers.   What followed was that one of the readers of the target of my blog post gave that author a heads up that I posted a “legitimate rebuttal” to his post, and said that it warranted a response.   Well, “Dave In Denver” did respond:  with blatant, factual lies.   Here was the response, in its entirety:

“LOL. KD needs to spend more time going thru the prospectuses. His blog post is more a criticism of PSLV than it is of my view on RCM. I should have clarified upfront that PSLV is a big-boy fund if you want to take delivery. But if you read the PSLV trust from front to back, you’ll find the physical audit mechanism is clearly defined.

There is NO defense of SLV and GLD. They have no bona fide physical audit mechanism. None. The accounting for SLV and GLD is purely paper. Read thru the prospectus. Just by virtue of the fact that at any given point in time, roughly 10% of each trust is sold-short means that there is a substantial amount of each trust that has ZERO metal backing. None. Sprott’s fund are always 100% backed by metal and you can not borrow the certs to short them. IF SLV AND GLD WANTED THEIR TRUST TO BE BONA FIDE PHYSICAL METAL TRUSTS, THEY WOULD NEVER ALLOWED THE SHARES TO BORROWED FOR SHORTING PURPOSES. That fact in of itself de-legitimizes GLD and SLV.

The one time the public had a chance to see into the GLD, and the GLD prospectus is largely the same as the SLV prospectus, Bob Pisani was taken to a stack of gold bars that was supposed to be GLD’s stack, he picked up a bar randomly and it turned out that the bar didn’t even belong to GLD. Anyone who saw that episode and owns GLD or SLV should have sold their holdings immmediately. An accounting of serial numbers means nothing. We’ve seen random studies that have show that the serial number list of GLD and SLV at any given time has several errors on it. That’s just for starters.

I don’t believe than any non-instutional investor should invest in ANY paper bullion trust. But if you have to, the Sprott fund is the best one.

I find it to be be quite facetious that KD has to deflect the real issues by pejoratively referring to professionals who spend, and have spent the last 11 years in my case, researching and studying every aspect of the bullion market as “silver bugs” or “gold bugs.” It’s the same bullshit Dennis Gartman pulls out when his only defense of a view is to throw the term “gold bug or bug” at the metals investing community. Laughable at best and highly unprofessional”

Should we walk through this one?  Let’s just stick to the FACTS, cause that’s easier than trying to argue with these zealots (oh crap – is that another pejorative term?  We’ll get to that too…)

1)  Dave writes:

“But if you read the PSLV trust from front to back, you’ll find the physical audit mechanism is clearly defined.”

Challenge:  Here is the PSLV prospectus.   Have at it.   Please show me the page number where the audit mechanism is clearly defined… Don’t waste all your energy though – this isn’t the important point – we’ll get to the good stuff in a minute.   The closest you will come is page 2, which tells us:

“The physical silver bullion will be subject to a physical count by a representative of the Manager periodically on a spot inspection basis as well as subject to audit procedures by the Trust’s external auditors on at least an annual basis.”

This seems like a good time to remind readers that PSLV’s external auditors are Ernst & Young.  Yes – the same Ernst & Young who audited Lehman Brothers and Sino Forest.

2) Dave writes:

“There is NO defense of SLV and GLD. They have no bona fide physical audit mechanism. None. The accounting for SLV and GLD is purely paper. Read thru the prospectus.”

Grossly, factually incorrect.  This is not my opinion – this is a fact – SLV is audited, physically, and its audit certificate, which details exactly what is done, is available to see for free, online.  Cliff notes: “All 318,578 bars were found to be in the vaults, consistent with the stated records of The Trust.

What IS my opinion, and I think that anyone who actually looks at the details will agree with me, is that $SLV’s audit procedure is SIGNIFICANTLY more robust than $PSLV’s.   Try to find the details of PSLV’s audit results – if you find them, please show them to me, because I haven’t found them yet.  SLV’s physical auditor is Inspectorate – a leader in precious metals auditing.

Oh, by the way – Warren James at Screwtape Files has been analyzing the publicly available bar lists that each exchange traded product publishes.   PSLV’s bar list is significantly more opaque than SLV’s bar list.  In Warren’s words:

“It’s one of those small details which people don’t seem particularly interested in, but here is the raw fact: 28% of PSLV’s holding cannot be verified as LBMA compliant. I have no doubt whatsoever that he holds the silver he claims, what I’m saying is that without the refiner information, it can’t be externally proven to be compliant. But apparently this has not bothered so many investors!”

3) Dave writes:

“Read thru the prospectus. Just by virtue of the fact that at any given point in time, roughly 10% of each trust is sold-short means that there is a substantial amount of each trust that has ZERO metal backing. None. Sprott’s fund are always 100% backed by metal and you can not borrow the certs to short them. “

Nonsense.  Blatantly FALSE.   Let’s start with the easiest lie to debunk:  PSLV can be borrowed and shorted.   Fact.  Although I am not currently short PSLV, I have shorted it in the past, when its premium to NAV got too large.  Here’s the current data from Interactive Brokers showing that the shares are relatively easy to borrow (though no-where near top-rate):

This is, of course, irrelevant to the metal backing or not backing the shares of the trust.  Short selling does absolutely nothing to create “unbacked” shares of either PSLV or SLV.   I pretty much explained this in “ETF Lesson, Part I,” using a different example.  Cliff notes:  when someone shorts shares, they have to borrow them first.  When you lend your shares, you no longer have the right to redeem them for the underlying assets.  In other words, if I lend you my shares, there is no risk that we both then go to try to redeem the shares with the Trust – when I lent you the shares, I gave up that right.  I can recall the loan if I want that right back.

If you’d like to learn more about this “unbacked shares” fallacy, read Gene Arensberg’s post at GotGoldReport, or the comment thread on a related post he did, where Bron Suchecki and I tried to explain it to one of the minions in the comments section.  You can also look at the comments on this Yahoo Message Board Thread (no joke!) from user “Silverbars,” who gets it.  Bottom line:  short selling of an exchange traded product does NOT result in that product having shares that are not backed by metal… Just like short selling of $AAPL doesn’t result in shares that are unbacked by Ipads and Iphones.

Furthermore, as I tried to explain to people last year, when PSLV was trading at a 20% premium to NAV, it was quite clear: factually, beyond debate, that a big chunk of the fund (that premium!) was NOT backed by physical metal.  The value of PSLV was positively NOT 100% backed by metal.   The good news for PSLV holders is that this “unbacked” amount is now less than 1%!

4) The thing about Pisani in the GLD vault:  yeah, and?  So does Dave think that GLD has even MORE gold than initially reported?  They even have MORE gold that’s NOT on their bar list?   Of course not – he’s making the common error of confusing:

a) “we picked up a bar in a vault that holds GLD’s gold along with the gold of other people, and we happened to pick up someone else’s bar


b) “we tried to find a bar that GLD said they owned, but we looked all over the vault and the bar wasn’t there.  We eventually found someone else who showed us title to the bar that we were looking for.”

Do you see the difference?   The latter would be a huge controversy!  The former was a case of sloppy reporting by Bob Pisani, who perhaps thought he was in a vault that held GLD’s and only GLD’s gold inventory.  In any case, you can view GLD’s vault inspection certificates online, for free, here.

As an aside, this Bob Pisani GLD event happened around 9/1/2011.  At the time, PSLV was trading at a roughly 20% premium to its Net Asset Value (the current premium is less than 1%).  If only investors had swapped out of PSLV and into SLV at that time, they would have saved themselves 19%.   Anyone who sold their SLV holdings, as Dave suggests in his comment would have been prudent, would have gotten killed by going into PSLV instead.

5) Dave thinks I’m unprofessional for using the term “goldbug” or “silverbug.”  He cites his last 11 years as evidence that he is an expert on the market about which he speaks.  Let me be clear:  I use these terms generally to refer to charlatans who pass themselves off as knowledgeable as they simultaneously demonstrate a gross lack of understanding about the very market they are trying to pontificate about – or to describe the followers of such charlatans.    As I’ve now spent two blog posts demonstrating, Dave in Denver clearly falls into the “doesn’t understand” category – either that or he’s just blatantly willing to ignore facts and make up his own reality.

Dave is, of course, not alone.  The precious metals complex is chalk full of charlatans parading as “experts.”  Telling The People what they want to hear doesn’t make you an expert, and my *opinion* is that this is why many loud PM voices are ignored in their breathless pleas to regulator and authorities:  after you demonstrate that your understanding of what you are talking about has major factual and conceptual errors, the People in Power don’t want to waste their time trying to deal with your complaints.

But I’m not “deflecting any real issues” by using the terms “goldbug” or “silverbug” – on the contrary – I’m addressing the real issues: factual errors made and propagated by those I refer to as “goldbugs” and “silverbugs.”

Please note, folks, the items above in this post are not the subject of a debate.  This is not an “argument” – this is me correcting blatantly factually incorrect information, and providing you with the reality of the situation.   There is nothing to “argue” because we aren’t talking about opinions*.  We’re talking about facts.

and so it goes…

Debunking Misleading Silver Posts With Pure Fact

SLV’s Vault Inspection Certificates

GLD’s Vault Inspection Certificates

PSLV Prospectus

disclosure: I currently have positions in $SLV, $PSLV, $CEF and $GLD.   These positions may change at any time.   My positions may be long or short, but are entirely unrelated to the content of this post.  Also note that nothing about this post expresses either a bullish nor a bearish opinion about either gold or silver.


*of course there are always a few opinions:  as noted above, I believe that SLV’s operations and audit procedures are much more transparent than PSLV’s, for example.

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