Eric King:  “John, I know you have seen today’s interview with Grant Williams, but I don’t think people around the world understand what’s happening with GLD.  People have tried to get their gold out of that ETF and you just can’t get it.”

Hathaway:  “That’s right.  If you are, say, Goldman Sachs or JP Morgan, or one of the big bullion dealers, you can exchange shares for gold.  And it’s just an arbitrage game for the dealers.

But if you are not within that system, and you have 100,000 shares of GLD, it’s like pulling teeth trying to get physical gold out of that ETF....

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“GLD basically just tracks the gold price, and the tracking error is very, very small.  So, if you are an investor and you simply want something in your portfolio that mimics the gold price, well, GLD does that.

What GLD doesn’t do and cannot do, is provide physical gold, and the protection that physical gold offers to an investor.  If an investor wants gold that is not part of the banking system, GLD is not the place to invest because it is part of the banking system.  It’s sponsored by State Street, and the gold is vaulted at HSBC.  So you couldn’t be more inside of the banking system than that.

If you are happy with that, and I’m not sure you should be, GLD is just fine.  If you have any reason to suspect the integrity of the banking system, which I sure do, I would look for a different way to hold my physical metal.  And I would do something that is outside of the banking system.

Look at what Poland just did to pension funds:  They just summarily wiped away half of the wealth of the Polish pension funds.  That’s what can happen to you if you are part of the financial system.  So I totally sympathize with those who rail against GLD because they can’t get physical gold.

In a way, by holding GLD you are basically conflating financial system risk, and the whole idea of holding gold in the first place is to avoid that risk.  That’s kind of a long rant, but that’s how I see it.”

Eric King:  “John, you have also taken a look at the charts published in Grant’s KWN interview, which shows the paper claims on gold skyrocketing to a new all-time high.”

Hathaway:  “Yes.  You can look at the charts that are in your interview with Grant Williams and they are absolutely correct.  We are talking about ‘Registered Gold,’ which is basically eligible for delivery if a holder of a futures contract submits the claim for delivery, and that gold is disappearing like water in the desert (see chart below).

So the ratio that is being talked about here is that ratio of ‘Open Interest’ to ‘Registered Gold.’  That shows you there is some degree of distrust and anxiety about the integrity of the COMEX as an intermediary between the financial markets and the physical gold market (Nick Laird’s Sharelynx chart is shown below).

I have been warning about this for a long time and so have a number of other people on KWN -- that the pyramid of paper, relative to the underlying gold, is large and it’s growing.  And people who hold paper claims like futures contracts, and notes from banks that have a derivative aspect to them, are simply kidding themselves if they think they have the protection that owning physical gold offers.

I think this is going to be one of the biggest stories over the next couple of years, and I do agree with Grant in that this is the sort of thing, in the right context, that could drive the price of gold much, much higher than anyone thinks, and by that I mean well north of $2,000.”

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