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As safe as gold -- which isn't spelled 'G-L-D'

Section: Daily Dispatches

10:45p ET Thursday, March 5, 2009

Dear Friend of GATA and Gold:

In their new essay, "As Safe as Gold," Eric Sprott and Sasha Solunac of Sprott Asset Management in Toronto make the case for the premier precious metal, and they are careful to distinguish between real metal and exchange-traded-fund metal. They write:

"Recently, the gold exchange-traded fund, as represented by the ticker GLD, has become a very popular investment vehicle for those looking to invest in gold. This ETF is now purported to hold over 1,000 tons of gold, having reportedly bought 220 tons in January alone. At this rate, GLD is effectively buying all the gold that is being produced at any given time. That's just one ETF.

"Being gold investors ourselves, we know the difficulties involved in taking physical delivery of gold. To buy physical gold in that quantity in that short a timeframe would be a significant market-moving event. Did they really buy that much physical gold? Furthermore, is all that gold tucked away in some vault? Maybe it is ... or maybe it isn't.

"GLD is a complex legal structure, with the Bank of New York as the trustee, HSBC Holdings as the custodian, and a chain of subcustodians and sub-subcustodians, many of which are banks that are known to actively lease gold.

"In our opinion, owning physical gold is very different from owning a lease-receivable. If any of the numerous counterparties were to default, it could be very difficult for GLD to actually get the gold it is purported to own.

"We're not saying that it's a fraud. It's a structure whose price is meant to legitimately track the price of gold. That said, in our opinion, an ETF is not a substitute for owning physical gold. It defeats one of the main reasons to own gold during these times -- namely, that gold is nobody else's liability. This is not the case with GLD. It is essentially a creditor, whose assets are somebody else's promise.

"Why take the risk? Especially when it will cost just as much, perhaps a little bit more, to own the real thing. Don't settle for a paper asset -- a second-rate knock-off. In this environment, counterparty risk lurks around every corner. Buy the real thing: GOLD, not GLD."

You can find the Sprott-Solunac essay at the Sprott Internet site here:

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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