Tag Archives: World Gold Trust Services

GLD Sponsor dodges disclosure details of Bank of England sub-custodian in latest SEC filing

In a July 11 BullionStar article, “SPDR Gold Trust gold bars at the Bank of England vaults”, I highlighted that the SPDR Gold Trust (GLD), in it’s Q1 2016 filing to the Securities and Exchange Commission (SEC), disclosed that during the January – March 2016 quarter, the GLD custodian HSBC had employed the Bank of England as a sub-custodian to hold some of the Trust’s gold bars, and that the largest quantity of gold that the Bank of England had held on behalf of GLD during the January – March 2016 period was 29 tonnes.

Note that the financial year-end for the SPDR Gold Trust is 30 September each year, so that its Q1 is October – December, its Q2 is January to March, its Q3 is April – June, and its Q4 is July – September with a year-end at the end of September.

The GLD disclosure for the calendar first quarter of 2016, which revealed details of sub-custodians that the SPDR Gold Trust uses, had begun to appear in the 10-Q filing specifically at the behest of the SEC, which on 29 March 2016 had sent a letter to the GLD Sponsor, World Gold Trust Services, directing the Sponsor to:

In future Exchange Act periodic reports, to the extent material, please disclose the amount of the Trust’s assets that are held by subcustodians.

The letter was sent to World Gold Trust Services by the SEC’s Senior Attorney Office of Real Estate and Commodities, Kim McManus.

To Recap, for the quarter ended 31 March 2016, (which is the SPDR Gold Trust’s Q2), the 10-Q report stated:

“Subcustodians held no gold on behalf of the Trust as of March 31, 2016. During the quarter ended March 31, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust’s gold at such date. The Bank of England held that gold as subcustodian.

I also pointed out in my previous article that:

Note that the wording of the 10-Q is such that it does not preclude the possibility that the Bank of England also held GLD gold at other times during Q1 2016, since it states “the greatest amount of gold” that the Bank of England held for the Trust was 29 tonnes. This implies that the Bank of England vaults could, at other times during Q1, have held less than 29 tonnes of gold on behalf of GLD.

My early July article also documented that:

“The second quarter saw a 15 tonne shrinkage of GLD’s gold holdings in April, but a very large 64.5 tonne increase in May, and a 81.4 tonne increase in June, making for a Q2 increase in GLD’s gold bar holdings of 130.77 tonnes. Very large 1-day gold bar additions occurred on 24 and 27 June (18.4 tonnes and 13 tonnes respectively). Overall, that’s 307 tonnes added to GLD in the first half of 2016.”

Finally, I also looked forward to the release of the 2nd calendar quarter 10-Q filing with the SEC, saying:

“The SPDR Gold Trust 10-Q for the 2nd quarter of 2016 will be filed with the SEC in about 3 weeks time, at the end of JulyWith the continuing large inflows into GLD in Q2 2016 it will be interesting to see whether the name of Bank of England as subcustodian of GLD reappears in the Q2 filing?”

As it turns out, the Sponsor of the SPDR Gold Trust, World Gold Trust Services, which is a fully owned subsidiary of the World Gold Council, and which is responsible for compiling and submitting GLD quarterly and annual financial reports, actually filed its latest GLD 10-Q report (for the 3 months to June 30, 2016) on 2 August 2016, a few days later than it usually would do for a quarterly report.

BoE-Gold

Smoke and Mirrors

Quite shockingly and in my opinion misleadingly, this latest GLD 10-Q filing only says the following about sub-custodians:

“Subcustodians held no gold on behalf of the Trust as of June 30, 2016. During the nine months ended June 30, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust’s gold at such date. The Bank of England held that gold as subcustodian.

This 10-Q report is signed by the CEO and CFO of WORLD GOLD TRUST SERVICES, LLC, Sponsor of the SPDR® Gold Trust, namely:

  • Aram Shishmanian, Principal Executive Officer (CEO)
  •  Samantha McDonald, Principal Financial and Accounting Officer (CFO)

In my opinion the latest sub-custodian statement by World Gold Trust Services is misleading in its entirety, as well as being evasive and disingenuous. By failing to address the quarter ended June 30 2016, the World Gold Trust Service CEO and CFO are avoiding disclosure of the quantity of gold that was held by subcustodians of the GLD during April, May and June 2016. Recall the ordinance from the SEC on 29 March:

In future Exchange Act periodic reports, to the extent material, please disclose the amount of the Trust’s assets that are held by subcustodians.

This latest 10-Q statement is not in compliance with the SEC’s directive. It also goes against the spirit of the SEC’s request – since it doesn’t address the holdings of sub-custodian during the quarter that’s being reported on, i.e. the April to June 2016 period. The language used in the latest 10-Q seems to conveniently circumvent the SEC’s disclosure request by using evasive phraseology.

For example, what if the Bank of England as GLD subcustodian held 28 tonnes or 20 tonnes of gold bars on a particular day during the second quarter of 2016, would  Aram Shishmanian and Samantha McDonald not consider this material enough to tell the SEC about. That’s what their signed statement would suggest. More importantly, what would the SEC think about such a non-divulgence of a 28 tonne or 20 tonne sub-custodied position during any day of the April to June 2016 period, when it had specifically asked to be informed of such occurrences via the 10-Q filing? Recall that there were very large increases in GLD’s holdings during May and June, and some huge one-day increases in GLD gold bar holdings on 24 June (18.4 tonnes) and 27 June  (13 tonnes).

SEC

Side by Side Comparison

Let’s take the latest quarter and previous quarter sub-custodian statements and compare them side by side.  For the quarter ended March 31,  2016, the 10-Q report said:

“Subcustodians held no gold on behalf of the Trust as of March 31, 2016. During the quarter ended March 31, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust’s gold at such date. The Bank of England held that gold as subcustodian.”

 For the quarter ended June 30, 2016, the 10-Q report said:

“Subcustodians held no gold on behalf of the Trust as of June 30, 2016. During the nine months ended June 30, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust’s gold at such date. The Bank of England held that gold as subcustodian.”

The very fact that the WGTS CEO and CFO revert to repeating a statement that was issued in the previous quarterly report and that applied to the first quarter of 2016, i.e. the statement in red above, shows that they are implicitly evading disclosure of new information from the April to June period. The statement in red is also irrelevant since it had already been disclosed in the previous 10-Q. By bundling it up and referring to the nine months ended June 30 2016, this smoke and mirrors tactic becomes obvious.

Given that it was only on March 29, 2016 that the SEC requested that WGTS disclose sub-custodian information, and that it requested “In future Exchange Act periodic reports … please disclose“ also underscores that the first three months of the nine-month period (i.e. October 2015 – December 2015) are irrelevant, and again highlights the deceptive nature of using a nine month time-frame in the latest statement. The SEC never asked for a disclosure about Q1 (October – December), just for disclosures about the quarters going forward.

Furthermore, the previous quarter disclosure specifically referred to “the quarter ended March 31, 2016”, and not the ‘six months’ ended March 31 2016. So why change the duration reporting to a “nine months ended June 30 2016” phraseology when it was previously a “quarter ended” phraseology? By moving to this ‘nine months’ misleading reporting device, it conveniently masks the disclosure of any sub-custodian details that might be applicable to the April – June quarter, such as Bank of England sub-custodianship of gold bars held within the SPDR Gold Trust.

And furthermore still, if you look at the latest 10-Q you will see that all of the other reporting in the 10-Q, such as financial highlights, divulges full data for three and nine month periods ended June 30, 2016. For example:

“Financial Highlights:

The Trust is presenting the following financial highlights related to investment performance and operations of a Share outstanding for the three and nine month periods ended June 30, 2016 and 2015.”

Therefore, the  financials in the latest 10-Q follow a reporting format of both 3 months and 9 months, but the WGTS does not see fit to report a statement about sub-custodian holdings during the latest 3 month period. This is inconsistent reporting and again points to a desire not to address sub-custodian activity during April – June 2016, specifically at the Bank of England.

Given that the revelation in the previous 10-Q report about the Bank of England being a sub-custodian of the SPDR Gold Trust was quite substantial news, surely the GLD Sponsor would want to address this topic in its subsequent 10-Q, even if it was to say that no GLD gold whatsoever passed through the Bank of England during the April – June period? However, it appears that they chose to construct and craft a selection of words through which to avoid addressing the issue.

Omission of Facts

Each 10-Q report submitted by World Gold Trust Services includes a number of appendices, one of which is an Exhibit 31.1, which is known as the “Certification of Chief Executive Officer, Pursuant to Rule 13a-14(a) AND 15d-14(a), Under the Securities Exchange Act of 1934, as Amended”. For the latest GLD 10-Q, this Exhibit 31.1 includes the statement that:

“I, Aram Shishmanian [WGTS CEO], certify that:

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

I would contend to the above certification, that the latest GLD 10-Q report does omit a statement of a material fact, i.e. disclosure of sub-custodians’ holdings as obligated by the SEC to disclose, or in the SEC’s words “the amount of the Trust’s assets that are held by subcustodians”; and that by omitting this information, the latest 10-Q report is “misleading with respect to the period covered”, which is the 3 months from 1 April 2016 to 30 June 2016.

The statement about sub-custodians in the latest 10-Q does not cover the period covered, i.e April – June 2016. It covers a nine month period. If none of the SPDR Gold Trust’s gold bars were held by sub-custodians during the April – June period, then why not say so?

Conclusion

It would be very interesting to see what the SEC thinks of this latest lack of disclosure from WGTS. It surely will raise some eyebrows at the SEC, since this is not what the SEC intended when it stated in its March 29 letter to WGTS that:

“Since the company and its management are in possession of all facts relating to a company’s disclosure, they are responsible for the accuracy and adequacy of the disclosures they have made.”

It also goes against the spirit of the request from the SEC’s Kim McManus, Senior Attorney Office of Real Estate and Commodities in her 29 March letter, and the promise by World Gold Trust Services’ CFO Samantha McDonald in her March 30, 2016 signed reply to the SEC that:

“We will, to the extent material, disclose in future periodic reports the amount of the Trust’s assets that are held by subcustodians”

I will contact WGTS directly and ask for their opinion on the above, and whatever response is received, if any, I will update readers via this forum.

Execs flee GLD – The revolving door at the SPDR Gold Trust Sponsor

A remarkable but little noticed development has occurred behind the scenes of the SPDR Gold Trust (GLD) over the last 3 years. This development concerns the very high level of executive staff turnover at World Gold Trust Services, the New York based ‘Sponsor’ of the mammoth gold GLD gold-backed Exchange Traded Fund that is listed on the NYSE.

For within the space of less than 3 years, World Gold Trust Services has gone through 4 Chief Executive Officers (CEOs) and 3 Chief Financial Officers (CFOs). By any standard this is a huge amount of senior executives moving through the roles, and would normally ring alarm bells in the corporate governance departments of major institutional investors. Perhaps it has caused concern among institutional investors of the SPDR Gold Trust (GLD), but if it has, it has gone unreported.

New York based World Gold Trust Services (WGTS) LLC is a fully owned subsidiary of the London-based World Gold Council. WGTS is a Delaware registered limited liability company (for-profit) established in 2003 by the World Gold Council and run out of offices at 685 Third Avenue, in midtown Manhattan, New York. The World Gold Council (WGC) itself is a non-profit association registered in Geneva under Swiss Civil Code Article 60. So the structure of the relationship is a non-profit organization, the World Gold Council, owning 100% of a for-profit company, World Gold Trust Services.

Revolving Door

In summary, here are the lists of CEOs and CFOs of World Gold Trust Services between 2013- 2016:

Chief Executive Officers (CEOs) of WGTS

  • Jason Toussaint: April 2009 – left July 2013
  • Kevin Feldman: Appointed June 2013 – Resigned 31st July 2014
  • Aram Shishmanian (acting): 31st July 2014 to 8 September 2014
  • William Rhind :Appointed 8th Sept 2014 – Resigned  9 February 2016
  • Aram Shishmanian (appointed): 10 February 2016

Chief Financial Officers (CFOs) of WGTS

  • Robin Lee : H1 2010 – Left WGTS / WGC December 2014
  • Adrian Pound: Appointed Oct 2013  – Resigned 10 March 2015
  • Samantha McDonald: Appointed March 2015

Last In First Out

On 10th February 2016, the SPDR Gold Trust filed a form 8-K with the US Securities and Exchange Commission (SEC) informing the market that WGTS CEO William Rhind had resigned, effective 12 February. The filing stated that:

“Mr. Rhind’s resignation was a personal decision and was not as a result of any CEO or WGTS performance-related issue or any other matters related to the operations, policies or practices of the Trust.”

On the same day, the board of WGTS (about which more below) appointed Aram Shishmanian, CEO of the World Gold Council, as CEO of WGTS, meaning that Mr Shishmanian is now CEO of both entities:

 “On February 10, 2016, the Board of Directors of WGTS appointed Aram Shishmanian, Executive Director of WGTS, as the Chief Executive Officer of WGTS.”

William Rhind had only been appointed CEO of WGTS on 8 September 2014, and so was CEO for a relatively short period of 17 months. Rhind’s departure looked to be sudden, since more than a month later in March 2016, the SEC was still addressing a letter to Mr Rhind even though he had departed.

When William Rhind was appointed to the CEO position at WGTS in September 2014, the World Gold Council issued a press release in which Aram Shishmanian said:

“Will’s career and experience to date means he is ideally placed to lead our ETF business through the next decade, sustaining and enhancing GLD’s position as the world’s leading physically backed gold ETF…”

This expectation from Shishmanian, that Rhind would be in the job for the next decade, also indicates that Rhind’s departure must have been a shock to the WGTS and WGC boards, especially to Shishmanian, who would not have envisaged that he himself would be back to being CEO of WGTS within 18 months of that statement, and not just in an ‘acting’ capacity, but rather in a full capacity.

Rewinding further, William Rhind had been appointed CEO of WGTS because the former CEO Kevin Feldman had himself resigned, on 31 July 2014, effective 15 August 2014. This too seemed to be a sudden departure because on 31 July 2014, the board had to make Aram Shishmanian “Acting Chief Executive Officer”, suggesting that the Board did not have the time to line up a successor or to run a search campaign.  Shishmanian’s Acting CEO position lasted nearly a month until Rhind’s appointment in September 2014.

In its form 8-K filing with the SEC detailing Kevin Feldman’s resignation, the SPDR Gold Trust statement says that:

“Mr. Feldman’s resignation was a personal decision and was not as a result of any CEO or WGTS performance-related issue or any other matters related to the operations, policies or practices of the Trust.”

Kevin Feldman had only been appointed as CEO of WGTS in late June 2013 when he joined the World Gold Council’s Investment area as an external appointment. This means that when Feldman resigned as CEO of WGTS on 31 July 2014, he had been in that role for about a year only.

Jason Toussaint, the predecessor CEO of WGTS departed in July 2013, and had been in his role since April 2009 following his appointment as head of the World Gold Council’s Exchange Traded Gold (ETG) group (which included the SPDR Gold Trust) in April 2009.

So overall, that’s 4 CEOs of World Gold Trust Services in less than a 3 year period.

 GLD NYSE

A Run on the Pound

Turning to the  number-crunchers, current WGTS CFO Samantha McDonald was appointed by the WGTS board of directors on 10 March 2015 “with immediate effect”, on the day that the previous WGTS CFO Adrian Pound resigned. Pound had been both Chief Financial Officer and Treasurer of World Gold Trust Services. The SPDR Gold Trust 8-K filing to the SEC about Pound’s resignation stated that:

“His [Mr. Pound’s] resignation did not arise from any disagreement on any matter relating to the operations, policies or practices of the SPDR® Gold Trust.”

Adrian Pound had only been appointed as WGTS CFO in October 2013, and so was only in the role for about 17 months, the same duration as William Rhind’s stint as WGTS CEO. Pound’s departure also looks unexpected since it was only announced to the SEC on 11 March 2015, and furthermore, Samantha McDonald took over the role “with immediate effect” and without a transition period.

Prior to October 2013, Robin Lee, the Secretary of the World Gold Council, had been the CFO and Treasurer of WGTS before Pound came in, and Lee signed off the accounts, for example in Q2 2013.  Robin Lee resigned as Secretary of the World Gold Council on 31 December 2014, and looks to have stepped down as CFO of WGTS by October 2013.

So, overall, that’s 3 CFOs of World Gold Trust Services in less than a year and a half.

The Board and Corporate Governance

World Gold Trust Services, the sponsor of the SPDR Gold Trust, has a Board of directors, however, according to a SPDR Gold Trust filing, this Board was only established on 24 January 2013. The Board consists of William J. Shea (Chairman), Rocco Maggiotto, Neal Wolkoff, and WGTS CEO Aram Shishmanian. The Board (Shea, Maggiotto, Wolkoff and Shishmanian) also established an audit committee and appointed Shea, Maggiotto and Wolkoff to serve as members of this audit committee.

As a reminder, Aram Shishmanian is CEO of the World Gold Council and is also CEO of World Gold Trust Services, and is also a board member of World Gold Trust Services. Aram Shishmanian became CEO of the World Gold Council in January 2009.

As CEO of the World Gold Council, Shishmanian has decision rights on the tenure of service and compensation of Shea, Maggiotto, and Wolkoff. In his role as CEO of WGTS, Shishmanian reports to the Chairman of the Board William Shea. This appears to be a very complicated and unusual organization structure of corporate governance. Furthermore, as mentioned above, World Gold Trust Services is a for-profit limited liability company and the World Gold Council is a non-profit Swiss Association. Potentially there could be conflicts of interest between the pursuit of commercial goals through WGTS and the pursuit of non-commercial goals through the WGC, especially as they have the same CEO.

 WGC in Peru

The Rush to Leave?

There are plenty of reasons why executives leave companies, including changes in reporting lines, smaller budgets, changes in job description, lack of opportunities, a fear of the company imploding, or just the pursuit of more attractive opportunities. Some of the above departures would surely fall into one or more of these categories. The short stints of CEO Kevin Geldman, CEO William Rhind, and CFO Adrian Pound are curious though since none of these people really stayed in their roles very long.

CEO Feldman resigned on 31 July 2014, and CFO Pound resigned on 10 March 2015, and CEO Rhind resigned on 9 February 2016. Although I am second guessing, in my view, some or all of these departures could be related to one or both of the following factors:

a) An environment of revenue and cost cuts at the World Gold Council and WGTS during 2014-2015

b) Pressure from the World Gold Council or elsewhere to push through a complicated and stressful ‘consent solicitation campaign’ in 2014 / 2015 that was required so as to alter the SPDR Gold Trust sponsor fee setup that allowed WGTS to collect a greater sponsor fee.

Point a) is pretty self-explanatory but I will illustrate it briefly below.

Point b) will make sense to readers after they have read future BullionStar coverage of the “GLD proxy consent solicitation campaign” which is very complex and quite shocking to the extent of the sheer constant barrage that WGTS unleashed on both institutional and retail GLD holders for months and months in the second half of 2014 and early 2015 to get the required proxy voting majority. This consent campaign eventually got the required ~51% of votes by the end of Q1 2015, and was effective by July 2015, after which WGTS began collecting 0.40% of the GLD NAV as sponsor fees. However, I’ll explain it very briefly.

Before the sponsor fee change, the GLD Sponsor Fee was 0.15% of the Adjusted NAV, or 15 basis points. The Marketing Agent fee (for State Street Global Advisors) was also set at 0.15% of the ANAV. The Trustee fee (to BoNY Mellon) was set at an annual rate of 0.02% of the ANAV, “subject to a minimum fee of $500,000 and a maximum fee of $2 million per year. The custodian’s fee (to HSBC) was approximately 0.06% of the NAV.

As mentioned in BullionStar blog “The funding model of the World Gold Council: GLD Fees and Gold Miner Dues” from June 2015:

Between June 2014 and February 2015, the GLD Sponsor, World Gold Trust Services, ran a protracted and non-stop blitz-like global consent solicitation campaign (using Broadridge and DF King) to try to persuade 51% of the beneficial owners of GLD Shares to consent to (vote for) 2 proposals that WGTS was desperate to push through. These two Sponsor proposals were to:

a) increase the Sponsor fee from 0.15% per annum to 0.40% per annum

b) to be permitted to compensate the World Gold Council and its affiliates for the provision of marketing and other services to the SPDR Gold Trust

Teeing up these 2 proposals for implementation required amendments to the GLD Trust Indenture. Changes of this nature to the Trust Indenture required 51% of GLD Shareholders to consent, hence the consent solicitation campaign. This 51% threshold was eventually reached on 25 February 2015, after which the consent solicitation campaign was halted.”

What WGTS and the World Gold Council did essentially was boost the sponsor fee to themselves while then having the power to pay out the rest of the fees to the other parties, i.e. to the Marketing Agent, Trustee and Custodian. This basically allows WGTS to keep the extra fees for itself and these are used as revenue by the World Gold Council. As you will see below, this strategy started to become lucrative in 2015.

The vast majority of World Gold Council funding has traditionally been made up of member dues (from its gold mining company members) and sponsor fees (from the SPDR Gold Trust). The sponsor fees pass through WGTS and are booked as revenue of the WGC (since WGC fully owns WGTS). This revenue model was altered over 2014/2015 as member dues were phased out and the World Gold Council / World Gold Trust Services eventually pushed through the amendment (by proxy solicitation campaign) to alter the fee structure of the GLD.

According to the WGC annual accounts for the year to 31 December 2014, in 2014, the WGC’s member dues fell to $12.5 million compared to $28.2 million in 2013. In 2014, sponsor fees from the GLD were down to $46.1 million from $75.1 million earned in 2013. This was because of a lower NAV of the SPDR Gold trust, i.e. smaller gold holdings of GLD multiplied by a lower gold price. By 2015 member dues had been phased out to zero and WGC was even more reliant on the sponsor fees from GLD. It appears the gold mining companies no longer were willing or able to fund the World Gold Council.

The WGC’s overall revenue  for 2014 was $61 million, which was $42 million less than 2013 total revenue of $103 million. WGC expenditure for 2014 was $85.3 million, down from $115.7 million in 2013.

Most of the expenditure drop came from reduced marketing development expenditure, with a small drop in general and admin expenditure, and a small reduction in personnel expenditure. With Revenue < Expenditure, the WGC had to eat into its cash, and the group’s cash holdings fell from $63.8 million in 2013 to $45.7 million in 2014, i.e. a reduction of $18.1 million in cash holdings.

Staff numbers at the World Gold Council stayed essentially unchanged in 2014, at 91 in December 2014, vs 92 in December 2013. However a reduction in the workforce was announced in January 2015 in Note 21 of the accounts, which stated:

“Note 21: Subsequent events:

On 20 January 2015, the company announced to its employees that it would be eliminating certain activities that will result in a reduction of its workforce and lower office requirements. It is expected that the costs of the restructuring will be in the region of $15 million. A provision of $11 million was made in the year ended 31 December 2014.”

From the World Gold Council 2015 accounts, by 2015, all WGC member dues (from the gold mining company members) had been phased out to zero, and the bulk of revenue, $66.9 million, came from the Sponsor Fees from the SPDR Gold Trust. Total revenue was $68.8 million. This meant that as of 2015, the GLD (a commercial ETF) was basically funding all of the operations of the World Gold Council (a non-profit association).

The WGC 2015 accounts also show (on page 34) that WGTS paid out the following fees in 2015 to the Marketing Agent, Trustee and Custodian, and some ancillary expenses:
  • Marketing Agent fees: $16.6 million
  • Custodian fees $4.1 million
  • Trustee fees $0.92 million
  • Other GLD Expenses: $4.9 million
  • Total of the above for 2015: $ 26.574 million

Given that the World Gold Council took in $66.9 million as Sponsor Fees from GLD for 2015, that’s a cool $ 40.3 million that the WGC kept out of the total Sponsor fee inflows. Now you can see why they were so eager to push through the consent solicitation campaign in 2014 and early 2015. Furthermore, GLD shareholders are essentially bank-rolling the entire operations of the World Gold Council. I wonder how many GLD shareholders are aware of this?

Finally, WGC expenses for 2015 continued to drop slightly to $82.3 million. Probably the most shocking thing about the 2015 World Gold Council accounts is that the employee headcount had dropped to 51 at the end of 2015 from 91 at the end of 2014. Therefore there were 40 fewer people employed by the group. That’s a 44% reduction in headcount over one year.

My guess is that in a World Gold Council environment of cost cutting over 2014 / 2015 and mass personnel departures, the work environment probably contributed to some of the CEO / CFO departures by the WGTS execs. Furthermore, as you will see in a future post about the ‘GLD consent solicitation proxy vote campaign’, because this was, in my opinion, a very misleading and confusing non-stop campaign that bordered on bullying GLD shareholders, especially the retail shareholders, this could have also taken its toll and resulted in CEO / CFO departures from the SPDR Gold Trust sponsor, i.e. New York based World Gold Trust Services.

In conclusion, it would be interesting to see what the large institutional shareholders of GLD such as Paulson and Blackrock make of this high turnover rate in GLD Sponsor executives, and what their corporate governance and proxy voting teams think of the WGTS driven GLD proxy solicitation campaign and the rather unusual governance structure of the World Gold Council and World Gold Trust Services.

SPDR Gold Trust gold bars at the Bank of England vaults

One of the most notable developments accompanying the gold price rally of 2016 has been the very large additions to the gold bar holdings of the major physically backed gold Exchange Traded Funds (ETFs). This is especially true of the SPDR Gold Trust (ticker GLD).

The gold bar holdings of the SPDR Gold Trust peaked at 1353 tonnes on 7 December 2012 before experiencing a precipitous fall in 2013, and additional and continued shrinkage throughout 2014 and 2015. On 17 December 2015, the gold holdings of the SPDR Gold Trust hit a multi-year low of 630 tonnes, a holdings level that had not been seen since September 2008.

GLD 5 year
SPDR Gold Trust – 5 year chart of gold holdings and gold price. Black line – gold holdings in tonnes. Source: http://www.goldchartsrus.com

By 31 December 2015, GLD ‘only’ held 642 tonnes of gold bars. See above chart. Then as the New Year kicked off in January 2016, something dramatic happened. The SPDR Gold Trust began expanding its gold holdings again, and noticeably so. By 31 March 2016, the Trust held 819 tonnes of gold bars, and by 30 June 2016, it held 950 tonnes of gold bars. The latest figure at time of writing is 981 tonnes of gold bars as of 8 July 2016. (Source: GLD Gold holdings spreadsheet).

This is a year-to-date net change of 338.89 extra tonnes of gold bars being held within the SPDR Gold Trust. See chart below. That’s a 52.8% increase compared to the quantity of gold bars the Trust held at the end of 2015, and a phenomenal amount of gold by any means, since it’s over 10% of annual new mine supply, and also a larger quantity of gold than all but the world’s largest central banks hold in their official gold reserves. Where is all of this gold being sourced from? That is the billion dollar question. Some is obviously being imported from Swiss refineries, but perhaps not all of it.

GLD 6 months
SPDR Gold Trust – 6 month chart of gold holdings and gold price. Black line – gold holdings in tonnes. Source: http://www.goldchartsrus.com

In January 2016, 26.8 tonnes of gold bars were added to the SPDR Gold Trust, while a massive 108 tonnes of gold bars were added in February 2016. The first quarter was rounded off with an additional 42 tonnes of gold bars added in March, bringing the Q1 additions held by GLD’s gold custodian HSBC London to 176.91 tonnes of gold bars. Noticeably, some large 1-day increases in GLD’s gold bar holdings occurred on 1 February (over 12 tonnes), 11 February (over 14 tonnes), 19 and 22 February (over 19 tonnes each day), and 29th February (nearly 15 tonnes), and also on 17 and 18 March (11.9 tonnes of gold bars added each day).

The second quarter saw a 15 tonne shrinkage of GLD’s gold holdings in April, but a very large 64.5 tonne increase in May, and a 81.4 tonne increase in June, making for a Q2 increase in GLD’s gold bar holdings of 130.77 tonnes. Very large 1-day gold bar additions occurred on 24 and 27 June (18.4 tonnes and 13 tonnes respectively). Overall, that’s 307 tonnes added to GLD in the first half of 2016.

Adding the 31.2 tonne addition for July to date gives the 338.89 tonnes addition figure quoted above. Most of this was due to a large 1-day inflow of 28.81 tonnes of gold bars reported on 5 July.

SEC – Reveal the subcustodians

I have detailed the above GLD gold bar holding changes to provide some background and put more color on the important discussion which follows.

While looking through SEC filings of the SPDR Gold Trust last month, I came across some interesting correspondence between the SEC and the sponsor of the SPDR Gold Trust, World Gold Trust Services. World Gold Trust Services is a fully owned subsidiary of the World Gold Council (WGC).

On 29 March 2016, the US Securities and Exchange Commission (SEC) sent a letter to the SPDR Gold Trust (c/o World Gold Trust Services, LLC) essentially telling the SPDR Gold Trust to in future specify in its SEC filings the identities of the sub-custodians that are storing any of the Trust’s gold bar holdings during each reporting period. The SEC’s letter stated:

“We understand that the Custodian may appoint one or more subcustodians to hold the Trust’s gold and that the Custodian currently uses a number of subcustodians, identified on page 18. You also outline risks that may arise in connection with the use of subcustodians. In future Exchange Act periodic reports, to the extent material, please disclose the amount of the Trust’s assets that are held by subcustodians.

The page 18 referred to by the SEC is page 18 of the annual 10-K filing of the SPDR Gold Trust for the year ended 30 September 2015, which includes the following paragraph:

The Custodian is authorized to appoint from time to time one or more subcustodians to hold the Trust’s gold until it can be transported to the Custodian’s vault. The subcustodians that the Custodian currently uses are the Bank of England, The Bank of Nova Scotia-ScotiaMocatta, Barclays Bank PLC, JPMorgan Chase Bank and UBS AG.

In accordance with LBMA practices and customs, the Custodian does not have written custody agreements with the subcustodians it selects. The Custodian’s selected subcustodians may appoint further subcustodians. These further subcustodians are not expected to have written custody agreements with the Custodian’s subcustodians that selected them. The lack of such written contracts could affect the recourse of the Trust and the Custodian against any subcustodian in the event a subcustodian does not use due care in the safekeeping of the Trust’s gold. See “Risk Factors—The ability of the Trustee and the Custodian to take legal action against subcustodians may be limited.”

LBMA above refers to London Bullion Market Association. Note that the SPDR Gold Trust prospectus defines subcustodian as:

“SUB-CUSTODIAN means a sub-custodian, agent or depository (including an entity within our corporate group) selected by us to perform any of our duties under this agreement including the custody and safekeeping of Bullion.”

The SEC letter was addressed to William Rhind who was CEO of World Gold Trust Services, but who actually had resigned as CEO on 9 February 2016, something the SEC should have known since the resignation statement was also filed with the SEC. After receiving the SEC’s correspondence, Samantha McDonald, CFO of World Gold Trust Services, responded by letter to the SEC the next day, 30 March 2016, confirming that:

We will, to the extent material, disclose in future periodic reports the amount of the Trust’s assets that are held by subcustodians. Please be advised that during fiscal 2015, no gold was held by subcustodians on behalf of Trust.

Note that filings with the US SEC use the naming convention 10-K for an annual filing, and 10-Q for a quarterly filing.

Following the stipulation from the SEC to World Gold Trust Services telling it to reveal its subcustodian holdings, its intriguing to note that when SPDR Gold Trust filed its next 10-Q on 29 April 2016 for the quarter ended 31 March 2016, page 15 of this filing revealed that the Bank of England, as subcustodian, had, during Q1 2016, held up to 29 tonnes of gold on behalf of the SPDR Gold Trust. The relevant section of page 15 stated the following:

“As at March 31, 2016, the Custodian held 26,484,117 ounces of gold on behalf of the Trust in its vault, 100% of which is allocated gold in the form of London Good Delivery gold bars including gold payable, with a market value of $32,760,852,177 (cost — $32,291,685,964) based on the LBMA Gold Price PM on March 31, 2016. Subcustodians held no gold on behalf of the Trust as of March 31, 2016.

During the quarter ended March 31, 2016, the greatest amount of gold held by subcustodians was approximately 29 tonnes or approximately 3.8% of the Trust’s gold at such date. The Bank of England held that gold as subcustodian.

As at September 30, 2015, the Custodian held 21,995,797 ounces of gold in its vault 100% of which is allocated gold in the form of London Good Delivery gold bars including gold payable, with a market value of $24,503,317,923 (cost — $27,103,546,125). Subcustodians held nil ounces of gold in their vaults on behalf of the Trust.”

Some Facts

From the above revelations, some facts can be stated:

  • The Bank of England held a maximum of 29 tonnes of gold on behalf of the SPDR Gold Trust on some date during Q1 2016.

Note that the wording of the 10-Q is such that it does not preclude the possibility that the Bank of England also held GLD gold at other times during Q1 2016, since it states “the greatest amount of gold” that the Bank of England held for the Trust was 29 tonnes. This implies that the Bank of England vaults could, at other times during Q1, have held less than 29 tonnes of gold on behalf of GLD.

  • As per the initial WGTS response to the SEC dated 30 March 2016, no gold was held by HSBC’s subcustodians on behalf of GLD throughout fiscal 2015 (1st October 2014 – 30 September 2015). Furthermore, GLD’s 10-Q to 31 December 2015 states that

To this can be added that according to the SPDR Gold Trust’s 10-Q for Q4 2015, “as at December 31, 2015…Subcustodians held nil ounces of gold in their vaults on behalf of the Trust

The GLD 10K (annual) for the year to 30 September 2015, filed on 24 November 2015, also contains a few statements addressing whether gold was held by subcustodians on year-end dates in 2014 and 2013. However, it states that subcustodians did not hold gold on behalf of the SPDR Gold Trust on these two dates. Page 44 states:

As at September 30, 2014, the Custodian held 24,867,158 ounces of gold in its vault 100% of which is allocated gold in the form of London Good Delivery gold bars including gold payable, with a market value of $30,250,898,159 (cost — $30,728,152,437). Subcustodians did not hold any gold in their vaults on behalf of the Trust.”

As at September 30, 2013, the Custodian held 29,244,351 ounces in its vault 100% of which is allocated gold in the form of London Good Delivery gold bars including gold payable, with a market value of $38,792,631,793 (cost — $35,812,777,235). Subcustodians did not hold any gold in their vaults on behalf of the Trust.”

How did Bank of England suddenly become a GLD subcustodian in Q1 2016?

As a member of London Precious Metals Clearing Limited (LPMCL), HSBC maintains gold bullion account facilities at the Bank of England which can be used within its LPMCL gold clearing role. All 6 LPMCL bullion bank members hold gold accounts at the Bank of England. The 6 LPMCL members can also all call on each other for physical delivery of gold and allocation of gold. All of these bullion banks except ICBC Standard are also Authorized Participants (APs) of GLD, i.e. Barclays, HSBC, JP Morgan, Scotia, and UBS. Other AP’s of GLD include entities of Credit Suisse, Goldman Sachs, Merrill Lynch and Morgan Stanley. Many of these bullion banks are also LBMA market makers in gold.

My view is that quite a number of other bullion banks that are members of the LBMA also hold gold accounts at the Bank of England, such as BNP Paribas, Natixis, SocGen and Standard Chartered, otherwise they would not be able to engage in the gold borrowing activities that they are on record of engaging in. If this is the case, then gold bars can easily be moved from central bank accounts at the Bank of England to bullion bank gold accounts at the Bank of England and vice-versa. Only APs of GLD are allowed to create baskets of GLD securities. This creation process requires that when GLD baskets created, APs have to deliver physical gold bars to HSBC.

There are therefore a number of  possibilities to explain how the Bank of England ended up being a sub-custodian for GLD in Q1 2016.

  1. An AP(s) had gold bars stored at the Bank of England, and delivered these gold bars to HSBC at the Bank of England in fulfillment of the GLD share creation process
  1. An AP(s) had an unallocated credit balance of gold with a LPMCL clearer or other entity which had gold stored at Bank of England or access to gold at the Bank of England, and as part of the clearing process the AP converted unallocated credit balances into allocated gold bars held at the Bank of England and delivered these gold bars to HSBC.
  1. An AP(s) borrowed gold from a central bank which had gold bars stored at the Bank of England and delivered these gold bars to HSBC as part of the GLD basket creation process.

The quantity of 29 tonnes is a lot of gold for an Authorized Participant or group of APs to have un-utilised in a vault at the Bank of England. It’s about 2320 large Good Delivery gold bars. Likewise, 29 tonnes is a lot of gold bars for LPMCL members to have as a clearing float at the Bank of England.

Furthermore, if an AP had acquired newly refined gold from a refinery with the intention of delivering it to HSBC as part of the GLD security creation process, why would this gold be delivered to the Bank of England vaults, and not directly to the HSBC vault? It would be more practical to have delivered that gold straight to the HSBC vault.

Therefore, its plausible that at least some of the gold being held by the Bank of England as sub-custodian on behalf of the SPDR Gold Trust was sourced from gold borrowed from central bank gold holdings at the Bank of England.

Bullion Bars Database

There is further support for borrowed gold bars being held by the SPDR Gold Trust during Q1 2016.

Warren James maintains a database of the identities of the gold bars held in the GLD over time which allows comparisons between the gold bullion coming in and out of the GLD. Each bar has a unique signature based on its brand, serial number, and weight. Gold bars coming into the SPDR Gold Trust can be tracked based on whether these bars were previously held in the Trust or whether they are bars coming in that have never been held by the Trust before. When a bar returns to the list after it was previously held but disappeared from the holdings, it’s called dark bullion since its identity is familiar but it’s not known where the bar has been since it left the GLD and re-entered.

Up until 10 February 2016, the percentage of dark bullion bars re-entering GLD that had previously been held by the Trust was about 30% of the inflows. As the inflows into GLD rose sharply from the second half of February, dark bullion entering GLD essentially stopped and nearly all of the bars being added to GLD were bars that had never been held by GLD before. These inflows were a combination of newly refined gold and older bars which are no longer produced. For example, gold bars coming into GLD in February 2016 have included hundreds of bars from the US Assay Offices and Mints, AGR Matthey, Johnson Matthey Plc (Royston), the Australian Branch Royal Mint – Perth, Engelhard, Kazzinc etc, all of which are no longer produced.

The fact that a large amount of older gold bars arrived into GLD from the second half of February onwards would suggest that these bars came long-held holdings in the vaults of the Bank of England, and consisted of borrowed central bank gold.

Some Questions

All of the above poses a number of questions:

  • If this known 29 tonnes of gold was held by the Bank of England as subcustodian for GLD during Q1 2016 but not held by the Bank of England as subcustodian at the end of March 2016, did it physically leave the Bank of England vaults, or was it just transferred to HSBC’s account at the Bank of England?

Note that nothing in the SEC filing rules or directives compels WGTS to specify if the GLD custodian HSBC is holding gold outside its own vaults, so in my view its possible that gold is held by HSBC on behalf of the SPDR Gold Trust at the Bank of England. Indeed, its possible that HSBC even leases vault space in the Bank of England vaults, a sub-leased vault facility. If the HSBC London gold vault is indeed in the location that’s documented here (HSBC’s London Gold Vault: Is this Gold’s Secret Hiding Place?), then it would appear that it’s not big enough to accommodate the entire gold bar holdings of GLD and all other HSBC customers’ gold, especially when GLD holding are and were over 900 tonnes.

  • Since the Bank of England didn’t hold any gold as subcustodian for GLD in fiscal 2015, but did in Q1 2016, how much of these large inflows of gold into GLD in Q1 and Q2 and July this year (documented above) involved metal stored in vaults at the Bank of England? And what changed in the London Gold Market to require gold held at the Bank of England to suddenly be needed to fulfill GLD gold delivery obligations?
  • Why are LBMA practices and customs so lax that it allows HSBC the custodian, not to have written custody agreements with the subcustodians. Surely the US SEC should have picked up on this?
  • Why did the SEC not ask iShares (IAU (which has 3 custodians) and ETF Securities to also alter their SEC filings to reveal subcustodians’ holdings. And for that matter why did the SEC not ask iShares to amend its disclosures to specify subcustodians in the Silver ETF – SLV.
  •  Why do central banks never publish gold bar lists detailing the serial numbers of their bars, and why is the Bank of England so against allowing central banks to do so. There are a number of FOIA requests (including one I made) providing evidence of the Bank of England’s refusal to allow central banks to publish weight lists / bar lists. Could it be that they do not want data on gold bar serial numbers entering the public domain as it would then show that leased and swapped gold is being held by commercial gold ETFs?

Audits of the SPDR Gold Trust’s gold bars

The SPDR Gold Trust ‘s gold bar holdings are physically audited twice per year. A partial physical audit is conducted in February/March of each year, and a full physical audit of the bars is done in September of each year. The current auditor is Inspectorate International Limited. In September 2015, Inspectorate conducted the 2015 full count of the Trust’s gold bullion held by the custodian HSBC London. That audit counted  54,807 London Good Delivery gold bars at the “London Vaults of HSBC Bank USA National Association”.  Note that the official custodian of the SPDR Gold Trust changed from HSBC Bank USA to HSBC Bank Plc in late 2014, so this audit should really state HSBC Bank Plc.

Inspectorate then conducted a random sample count audit in early Mach 2016 at the “London Vaults of HSBC Bank Plc” based on a date of 19 February 2016. As of that date, the “account (GLD) held title to 56,913 London Good Delivery, large Gold Bars“. However, this audit was “a statistically random count of 16,493 bars of gold”, based upon the gold inventory as at 19 February 2016, and it was carried out between 29 February and 11 March “at the Custodian’s premises“.

Given that the Bank of England acted as a subcustodian to the SPDR Gold Trust during Q1 2016,  the question arises as to whether  all of the other 40,420 (56,913 – 16,493) bars were at the “Custodian’s premises” during the audit,  or were some of these other bars being held in the Bank of England vaults. It’s not clear why a random sample of 16,493 bars (about 206 tonnes, and 29% of the total holding) was chosen, but it’s about 2/7ths of the gold bars held by GLD.

There is no mention of the Bank of England in Inspectorate’s latest audit report. However, there is nothing to say that some of GLD’s bars were not in the Bank of England at the time of the audit. The audit doesn’t say so one way or the other, and the way its worded means that it doesn’t say all of the inventory is at HSBC’s vault, just that the audit was conducted at HSBC’s vault.

Conclusion

Central banks continue to report leased and swapped gold (gold receivables) as an asset on their balance sheets. This accounting fiction, which doesn’t follow any international accounting standards is a sleight of hand that allows the same gold to appear to be in two places at once. If gold bars that have been leased from central banks are being held in the SPDR Gold Trust, then these gold bars are being double-counted, and GLD shareholders should be made aware that the Trust is holding gold that has been ultimately borrowed from central banks. Using borrowed central bank in an ETF doesn’t put the ETF on the hook, since the ETF owns this gold. But it does mean that the bullion banks will need to return the equivalent amount of borrowed gold to the lending central bank from other sources. Importantly though, this type of activity will overstate the amount of gold held by the combined official sector and ETF sector.

The SPDR Gold Trust 10-Q for the 2nd quarter of 2016 will be filed with the SEC in about 3 weeks time, at the end of July. With the continuing large inflows into GLD in Q2 2016 it will be interesting to see whether the name of Bank of England as subcustodian of GLD reappears in the Q2 filing?

And if gold bars held by GLD are actually stored at the Bank of England vaults when the  full physical gold bar audit is conducted next September, surely the full audit report should require a passage stating that some of the gold bars audited were held at the Bank of England, and not just at the ‘London Vaults of HSBC Bank’? Since the SEC have opened this ‘can of worms’ issue, and created more questions than answers, perhaps it is now in the SEC’s interests to go even further and ask World Gold Trust Services to fully clarify the matters raised above. Otherwise, the GLD gold bar holdings will continue to be a source of intrigue and debate in the gold world.