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No debt relief, no yuan float, empty promises on U.S. deficits -- what success!

Section: Daily Dispatches

By Howard Ruff
The Ruff Times
February 2005

I recently got a phone call from a subscriber, David Homes. He is a
very sophisticated and significant gold investor. He has been
viewing with alarm the development of exchange-traded funds, or
ETFs. They will be touted more and more but he has some serious
reservations. I asked him to write an article. Read it carefully,
and I have some comments at the end of the article.

* * *

By David Homes

You're bound to hear about the latest craze in gold investing: GLD.
This "exchange-traded fund," or ETF, is supposed to make gold
investing simple and convenient.

Each share of GLD is valued at one-tenth of an ounce of gold's
current market price. Apparently GLD merely "tracks along" with the
current spot price of gold with no real ability to redeem your
shares for physical metal. To me this sounded like some kind of side-
betting racket, so I contacted Merrill Lynch for some answers.

Merrill Lynch is offering GLD, but for serious questions the local
broker referred me to the powerful research department in New York.
They raised more questions than answers.

My next stop was the Securities and Exchange Commission. After the
expected pinball routine, I ended up chatting with one of their
enforcement lawyers, who indicated that I was not the first GLD
prospect with concerns. Evidently GLD was facing the possibility of
a formal investigation after just a few weeks of operation.

It would appear that the legal structure of GLD was so carefully and
intricately conceived that it was able to circumvent even the most
basic disclosure and reporting requirements of the SEC itself. What
are they trying to hide? No publicly traded company enjoys this kind
of privacy.

I learned that the ambiguous World Gold Council was involved with
GLD, so I contacted them next. After many attempts and several days,
I finally made a meaningful connection. My first question addressed
the opacity of GLD. The WGC official's response was simply not
credible. He said, "Because we are dealing with gold, the SEC
requires that we adhere to certain security procedures."

He told me that all gold was held in London in the HSBC vault. My
next question was my last: "Are client funds backed up with 100
percent physical gold, or would you be including future-production
pledges as part of the assets?"

"Sir, I really cannot discuss this with you because of the way we
are structured. Good day."

Bottom line: The problem I have with the whole idea of ETFs is this
opacity and the potential drag that it could represent to the real
gold market.

The best insurance for a strong gold bull market is, of course,
physical ownership of the metal by the public -- period.

At best ETFs represent something less than 100-percent real-market
impact. At worst ETFs are just the latest scheme by major gold
interests and the Silver Users Association to maintain price and
inventory controls. By creating a popular side-betting mechanism,
they are able to divert and neutralize billions of dollars that
otherwise could have a major impact on the price and supply of the
physical metals.

In fact, that these ETFs are popping up could mean that metal
inventories are getting desperately low.

Prove me wrong. I'll give 100 ounces of silver to the first person
who can convince me, with evidence, that GLD is not a Trojan horse.
Until then, my money is on physical metal and quality mining shares.

* * *

David's essential gripe is that buying shares of GLD will not take
gold off the market and reduce supplies as a normal gold purchase
would, raising the price. Consequently, GLD will have no effect on
the gold price. Perhaps GLD is useful as a tracking mechanism but
lacks the real-world effect on price. In other words, the world
could buy GLD and gold wouldn't budge an inch.

-- Howard Ruff


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