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Dear Elon Musk, Buy Physical Gold and Silver Now, not Paper ETFs

Jeff Clark, Senior Analyst, 
FEB 11, 2021

Editor’s Note: The following is an open letter to Elon Musk, in response to Tesla’s recent 10-k filing that stated in addition to buying bitcoin it also “… may invest a portion of such cash in certain alternative reserve assets including… gold bullion, gold exchange-traded funds and other assets as specified in the future.”

We hope you’ll help us get this urgent warning in front of him, starting with a letter he could be sent in the future if he buys paper gold…

Dear Elon Musk, Buy Physical Gold and Silver Now, not Paper ETFs

To: Elon Musk, CEO of Tesla Corporation

From: Bullion ETF Manager

Subject: Fund NAV Falls Below Gold Price

Dear Mr. Musk,

We regret to inform you that due to the counterparty risks of our bullion ETF, the fund’s NAV (Net Asset Value) does not currently match the spot price of gold.

We recently discovered that some of the gold bullion acquired by our sub-custodians is below the requirements as set forth in the Trust Agreement. As a result, the NAV of the Trust has sustained a loss, since the value of all shares are affected in events like this.

This means that if you sell shares of the ETF, the value of those shares will be below the spot price of gold on the exchanges.

This has unfortunately forced us to enact the clause in our prospectus that allows us to temporarily deny all requests for delivery of metal. We regret this action, but to preserve the integrity of the fund, this exception had to be activated.

As a friendly reminder, our prospectus limits the extent of legal recourse by shareholders against the Trust. This extends to a bankruptcy filing, which may or may not return your full investment to you and could take years to settle.

We apologize for any inconvenience.

- John D. WallStreet
Hypothetical ETF Manager

P.S. Why didn’t you just buy real gold?

Elon, this letter is not hyperbole…

Bullion ETFs have language that details these risks, and allows for these and other exemptions. Since a shareholder doesn’t own gold but instead just shares in a trust, ETFs introduce a slew of risks that aren’t present if one simply buys gold bullion.

It would be quite concerning to see the NAV (Net Asset Value) of the fund you bought separate from the price of gold—but this risk has already occurred in other ETFs…

During the market crash in March 2020, a fund of gold producers (GDX) did not track its NAV and sold for less than the value of the underlying assets. It was ultimately resolved, but it showcased the vulnerability that paper representations carry vs. real assets.

Here’s why we—as huge fans of your revolutionary ideas—urge you to consider buying real metal. It all centers around these two words…

Counterparty Risk

Counterparty risk is simple: it means you rely upon another party to make good on your investment. If they fail, for any reason, your investment is in jeopardy. Even a simple savings account relies on the bank to be in a position to honor paying out your savings at any time and in any amount including your accrued interest.

Every bullion-backed ETF has counterparty risk. When you buy a gold fund, you rely upon many factors, probably more than you realize…

  • Fund structure
  • Chain of custody
  • Management proficiency
  • Operational integrity
  • Delivery agreements
  • Regulatory oversight

If any of these break down, your investment could be at risk. Delays for redemptions could easily take place. If we get a shift in the monetary system, it is entirely possible that one or more of these counterparty risks will materialize with bullion ETFs.

Here are three distinct counterparty risks of gold ETFs that we want you to be aware of as you decide what form of gold to buy…

Risk #1: Who’s on First?

A lot has been written about the pitfalls of GLD (SPDR Gold Trust), the largest gold bullion fund in the market. But what many investors don’t know is that it carries enormous counterparty risk.

The following statements are all buried deep within the fund prospectus:

  • If the Trust’s gold bars are lost, damaged, stolen or destroyed under circumstances rendering a party liable to the Trust, the responsible party may not have the financial resources sufficient to satisfy the Trust’s claim.
  • If the Custodian becomes insolvent, its assets may not be adequate to satisfy a claim by the Trust or any Authorized Participant. In addition, in the event of the Custodian’s insolvency, there may be a delay and costs incurred in identifying the gold bars held in the Trust’s allocated gold account.
  • The gold bullion custody operations of the Custodian are not subject to specific governmental regulatory supervision.
  • The Trust’s obligation to reimburse the Marketing Agent and the Authorized Participants for certain liabilities in the event the Sponsor fails to indemnify such parties could adversely affect an investment in the Shares.

Does any of this sound like a sturdy investment? Hardly. In a push-come-to-shove environment, the risk is transferred to Tesla’s Treasury. The fund is set up to protect itself before the investor. Worse, in the event any of these events take place, the ETF may not even track the price of gold.

That’s not all. You may be surprised to learn that GLD hires "subcustodians" to store some of their gold. But that relationship has glaring loopholes and potentially fatal flaws. Check out some of these statements from the same prospectus:

  • Under English law, neither the Trustee nor the Custodian would have a supportable breach of contract claim against a subcustodian for losses relating to the safekeeping of gold.
  • If the Trust’s gold bars are lost or damaged while in the custody of a subcustodian, the Trust may not be able to recover damages from the Custodian or the subcustodian.
  • Because neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians who may temporarily hold the Trust’s gold bars until transported to the Custodian’s London vault, failure by the subcustodians to exercise due care in the safekeeping of the Trust’s gold bars could result in a loss to the Trust.
  • The Custodian is required under the Allocated Bullion Account Agreement to use reasonable care in appointing its subcustodians but otherwise has no other responsibility in relation to the subcustodians appointed by it. These subcustodians may in turn appoint further subcustodians, but the Custodian is not responsible for the appointment of these further subcustodians. The Custodian does not undertake to monitor the performance by subcustodians of their custody functions or their selection of further subcustodians. The Trustee does not undertake to monitor the performance of any subcustodian.
  • The Trustee may have no right to visit the premises of any subcustodian for the purposes of examining the Trust’s gold bars or any records maintained by the subcustodian, and no subcustodian will be obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian. The ability of the Trustee and the Custodian to take legal action against subcustodians may be limited, which increases the possibility that the Trust may suffer a loss if a subcustodian does not use due care in the safekeeping of the Trust’s gold bars.

So here’s what we have… GLD’s custodian has subcustodians… and those subcustodians can have subcustodians… and all these subcustodians can store gold without a written custody agreement… and GLD has no right to visit the storage facility… and the lack of documentation could affect the performance of the trust… and GLD has limited legal recourse?

This doesn’t sound legal, let alone smart. It clearly makes GLD an accident waiting to happen. This “chain of custody” is so poorly structured that it makes the fund highly vulnerable to all kinds of mishaps.

All it will take is for one supplier to knock over the first domino—“gee guys, we can’t get our hands on the gold we were holding in the fund,” for example—and the ripple effect could instantly cripple the fund and force management to freeze withdrawals. In that scenario, you would not be able to cash out your position.

And consider this: while the gold price would soar on this news, the price of the fund—and your investment—would plummet!

These are obvious flaws with GLD, but it’s not the only risk gold ETFs face…

Risk #2: Paperwork? We Don’t Need No Stinkin’ Paperwork!

If you think GLD carries a lot of risk, wait until you see this…

Blackrock, the sponsor of the world's second most popular gold ETF, IAU (iShares Gold Trust), admitted in 2016 that it had failed to register new shares with the SEC. Exchange-traded commodity funds are required to do this, but BlackRock reported there was an “administrative oversight” and they sold shares that didn’t yet exist.

Management claimed IAU shares continued to trade without interruption, but the reality is that management lost administrative control over the fund. They were fined by both the SEC and state securities agencies (in addition to possible lawsuits from shareholders).

At least the SEC was on the job—NOT! It turns out the “oversight” only came to light because the fund itself informed the SEC. In other words, regulators weren’t even aware of the violation!

All told, IAU sold $296 million worth of unregistered shares. The problem for investors was that until those shares were registered, the price of the fund did not track the price of gold.

  • Imagine logging on to your account and finding the price of gold rising but the price of your gold fund falling—that’s exactly what happened to IAU shareholders.

Management blamed a spike in demand at the time, but that spike was certainly no more than what we’ve seen many times in the past. What happens when (not if) gold demand soars again? What if we get some sort of gold mania? And what does this say about how well equipped this management team is to handle these and other crisis-type events?

This blunder shows that management proficiency of this fund is lacking. All ETFs are subject to managerial skill—or lack thereof.

Most investors were completely unaware of this development. If a stampede for the exits had started, almost none would’ve got out intact.

The next counterparty risk may be the biggest of them all…

Risk #3: Storing Gold on the Titanic

HSBC is Britain’s biggest bank. It is also the custodian for GLD, which means it buys and stores gold for the fund.

Unbeknown to many GLD investors, HSBC has a history rife with scandals that include predatory lending, tax evasion, and even accusations that their lack of controls helped terrorist groups and drug traffickers. Their “rap sheet” is pretty long…

  • In January 2013 HSBC paid $249 million to settle charges of foreclosure abuse
  • In March 2013 the government of Argentina filed criminal charges against the local subsidiary for helping businesses evade taxes and launder money.
  • In April 2014 the US Justice Department warned the bank needed to do more to improve its safeguards against money laundering.
  • In July 2014 the US Attorney for New York reported that HSBC would pay $10 million and admit to misconduct to settle civil fraud charges for failing to monitor reimbursement claims submitted to the federal government in connection with foreclosures on government-insured mortgages.
  • In November 2014 HSBC was fined $275 million by then CFTC and $343 million by Britain's Financial Conduct Authority for manipulating the foreign exchange market.
  • In the same month, a unit of HSBC paid $12.5 million to settle SEC charges that it failed to register with the agency before offering cross-border brokerage and investment advisory services to US clients.
  • In 2015 HSBC it was reported that HSBC helped wealthy customers of its Swiss private banking unit evade taxes.
  • In February 2016 HSBC paid $470 million to settle abuses related to mortgage origination, servicing, and foreclosure.
  • In July 2016 one HSBC executive and a former colleague were charged with conspiracy to commit wire fraud for foreign exchange manipulation.
  • In January 2017 HSBC was fined $32.5 million for failing to comply with a 2011 order that directed the bank to overhaul its foreclosure practices.
  • In October 2018 HSBC agreed to pay $765 million to settle allegations it had covered up risks associated with mortgage-backed securities.
  • In December 2018, when Chinese telecom giant Huawei Technologies’ CEO was arrested for allegedly evading US sanctions against Iran, the probe included whether HSBC conducted illegal transactions.
  • In 2019 a subsidiary of HSBC paid $192 million and entered into a deferred prosecution agreement with the U.S. Justice Department to resolve allegations that it conspired with customers to help them evade taxes.

Does this sound like a bank you want to be the custodian of your gold ETF? One that has had billions of dollars in fines?

The answer is an obvious and resounding NO. And yet HSBC continues to be the cornerstone agency responsible for storing and supplying bullion for the GLD fund.

The thing is, most bullion ETFs store their gold at a bank. And that is the bigger problem for investors:

One reason to hold gold is to protect against the banking system—and most ETFs are part of that very system.

This link between bullion ETFs and the banking system puts your investment at risk during an economic or monetary crises. Bullion ETFs are vulnerable to all kinds of restrictions, emergency regulations, and even bank closures.

The #1 Reason to Hold PHYSICAL Gold

Elon, I’m sure you don’t want to experience delays selling your bullion ETF… or getting proceeds paid out… or to find out the fund doesn’t have the gold it thought it had… or to watch your fund fall while the gold price rises.

All these and more can impact the #1 reason you want to have physical gold:

  • In a crisis, it’s important to be liquid

That’s easily feasible with a fully allocated storage program, one that’s outside the banking system, fully insured and audited, guarded by guys with guns, all of which comes with the convenience and ease of electronic trading.   

The primary reason to buy real gold instead of a paper product is because the nature of a crisis could demand one have physical metal, at least for a short time. You need more than just price exposure: you want gold in your control to get through a crisis.

Is YOUR Gold Investment a Safe Haven?

Bullion ETFs are a nice idea, but the risks are a very real and present danger. Worse, the reason you own gold is to protect against financial and economic uncertainty, and you could lose that advantage if you own a paper form of gold that comes with all kinds of counterparty risks.

Yes, holding physical gold isn’t risk-free, either. But, if you hold anything from fractional coins to 400-ounce gold bars, you hold a tangible asset that has virtually no counterparty risk.

  • Physical gold, in your possession, is the most crisis-proof asset you can hold.

Any type of crisis could put gold ETFs under greater and greater pressure, making them unable to offer safety from the very events they are supposed to protect us against.

Be the avantgarde person you are and buy real gold, and not a paper proxy, promise, or pawn. Your shareholders will thank you—so will your future self.

And Lock in Your Silver Now!

Elon, as you know, the products your companies manufacture require silver—lots of it. Why not secure your future supply by buying it now?

Your risk is that the silver price spikes—something it is highly prone to doing—which means your costs could potentially skyrocket very abruptly.

You said that Tesla plans to sell 20 million EVs by 2030. The company produced 430,400 units over the past four quarters, so that would be 19,569,600 more vehicles within nine years… each EV uses up to 50 grams of silver, which totals 978.4 million grams. In other words, if you reach your 2030 sales goal…

  • Tesla will need up to 31.45 million ounces of silver PER YEAR!

The cost to you at $25 silver is $786.25 million—but the cost to you at $50 silver is $1.57 billion. And at $100 silver it’s a whopping $3.145 billion!

And that’s just your automobile business. Not to mention your energy business, aeronautics business, etc.

Why not secure the supply you’ll need now, before it’s more expensive to purchase, and before other companies start gobbling up supply, too.

I urge you to take delivery of this vital metal that helps make your technologies as special as they are.


-Jeff Clark and the entire GoldSilver staff

(Follow Jeff on Twitter @TheGoldAdvisor)