15 July 2014

GLD amendment refers to "unforeseen reasons" for unallocated failure

GLD has some amendments to its terms up for vote, one of which is "that creations may only be made after the required gold deposit has been allocated to the Trust Allocated Account from the Trust Unallocated Account" (hat tip I Shrugged; see here for an explanation of the existing creation process). What is interesting is the explanation of why they are making this amendment:

"This amendment provides additional security for Shareholders by eliminating potential risks related to issuing baskets of Shares against unallocated gold if the Custodian was to become insolvent or if the unallocated gold was otherwise not allocated for some other unforeseen reason."

My emphasis on the bold bid. The risk they are referring to here is because the Authorised Participants only deliver unallocated to the Custodian and it is up to the Custodian to find the physical to allocate. This puts all the pressure on the Custodian. The amendment does raise the following questions:
  • Why the need to clarify this now, is there something the World Gold Council (who sponsors GLD) knows about the state of the market that didn't exist before?
  • Why would unallocated gold now have a risk of not being allocated?
  • Is there an increased risk of intra-day failures for large unallocated allocations?
  • What are these unforeseen reasons?
  • And why are none of the more excitable gold commentators hyping this up as more proof of the end of the London bullion banking system? :)(Probably because they didn't get the letter as they are smart enough not to hold GLD, which has numerous other issues which only make it suitable for short term trading IMO).
I don't think this is a case of the WGC responding to public criticism, as I haven't seen any commentary on this detail/technical matter of ETF operation. Maybe they just thought they would close up this risk point while they were making changes to the management fee revenue. However, that would beg the question of when did they become aware of the "potential risks" in the creation process and why didn't they fix it earlier?

At this point I would just note it as a data point, rather than a sign of "an imminent LBMA default", which was first predicted by one commentator in April 2013, which, even by the lax standards of internet accountability, is a fail (don't shoot the messenger, but clearly the fractional reserve bullion banking system is more robust than many give it credit for).

For the Perth Mint at the moment wholesale and retail demand are weak at best. Kilobar demand was so low we were considering shipping gold TO London but there has been a little pick up in kilobar interest this week. The recent GLD additions are positive but other ETFs have had liquidations so this indicator is unclear. All considered I don't see this as a situation where London is under pressure.

The other amendment to GLD is a rejig of who pays its costs and gets its management fee. Currently the Trustee pays (by selling gold behind the ETF):
  • Sponsor (ie WGC): 0.15%
  • Marketing Agent: 0.15% 
  • Custodian: approximately 0.066%
  • Administration Fees: approximately 0.03% to 0.04%
  • Trustee: $2 million
The proposal is that the WGC will take on all costs and only charge the Trust 0.40%. It just formalises the existing "Fee Reduction Agreement" by which the WGC was absorbing any costs above 0.40% so that GLD holders only paid 0.40%.

I can't see any material change here. Possibly the WGC feels they may be able to control or reduce costs better now that GLD is established and hence it sees an opportunity to make a bit more profit out of GLD beyond the current arrangement, as noted in the amendment letter "the net amount earned by the Sponsor could be greater or smaller than the fee of 0.15% of the daily ANAV of the Trust it currently earns, depending on the actual expenses of the Trust."

Coincidental this happens when two large South African miners (Gold Fields and AngloGold Ashanti) dropped out of the WGC and thus the WGC lost a big revenue source? While that announcement happened after the amendment letter, the WGC would have know about this move by the miners for some time. Just another move towards the WGC becoming more self funded.

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