What's Behind Gold Fund Sales?
Since Dec. 21, the GLD gold exchange traded fund (ETF) has disposed of 2.2 million ounces of its physical gold. This is an acceleration of the trend where GLD has reduced its gold holdings by 3.2 million ounces over the past seven months.
On Jan. 25, GLD unloaded approximately 1 million ounces of gold, which was almost 2.5 percent of the fund’s entire gold position!
There are only two reasons why the GLD exchange traded fund would reduce its gold holdings. The minor reason is that it could sell of some of its gold in order to pay ongoing expenses of the ETF. The major reason is that shareholders have submitted a minimum of 100,000 shares to redeem them for approximately 10,000 ounces of physical gold.
Private investors are not allowed to contact GLD directly to turn in shares for physical gold.
Instead, they are required to go through one of 16 Authorized Participants. In the process, the investor turns over 100,000 or more shares to one of these Authorized Participants, who then creates a “basket” for the receipt of the physical metal when they submit the share for redemption. Naturally, the investor has to pay a fee for these services.
Authorized Participants include subsidiaries of Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Merrill Lynch, Morgan Stanley, Republic Bank, Scotia Bank and UBS, among others.
Since GLD began operations in 2004, it has experienced 1 percent or more daily declines in its gold holdings only 41 times. Declines of 2 percent or more are extremely few. Declines of 1 percent or more have almost always been associated right at or clustered around important lows in the gold price. Daily declines of 2 percent or more have a 100 percent correlation with the price of gold reaching a major low.
The last two times that GLD has dispositions of 1 percent or more of its holdings were on July 28, 2010, and Oct. 7, 2010. The first of these instances was the very lowest gold price during the summer of 2010. The second occurrence happened after the price of gold reached an all-time high. Gold again set another all-time high just a few days later.
When GLD gold holdings fell 2 percent on Sept. 9, 2008, it was followed by a 30 percent rise in the gold price.
Past performance does not guarantee future results, but I think there is a logical explanation of why this correlation occurs. I don’t have the data to prove or disprove this, but it is quite possible that the large dispositions by GLD may be initiated by one or more Authorized Participants themselves, who are desperately seeking physical gold to use to help suppress gold prices. Accessing gold by this means would be considered a last resort because the information on the decline in the ETF holdings would be reported to the public. Price suppression would be more effective if the gold could be surreptitiously acquired from central banks or from leases.
Obtaining physical gold from an ETF could also explain why gold prices invariably rise after such a move. Smart investors would realize that such a step indicates a severe shortage of physical metal and move in to make quick profits by squeezing the short sellers.
You might think that good reporters would be eager to investigate the reasons behind these sudden daily declines in GLD gold holdings, but you would be wrong. After the large disposition last Tuesday, Alix Steel of www.thestreet.com wrote that the GLD sell-off was related to investors dumping their gold holdings (note: I am not denigrating Ms. Steel’s overall work; she was kind enough to quote me in another story she wrote on Jan. 27). That interpretation was echoed in at least two stories posted by Reuters. These reports totally miss the mark. Investors getting out of the gold market would simply sell their shares of GLD, not arrange to redeem them to take physical possession of the gold.
However, mainstream reports that the decline in GLD holdings somehow represents declining investor interest in gold could have the effect of scaring some existing gold owners into selling and deter some potential buyers against making purchases. But such stories would likely only have a short term effect if there really is a continuing bull market in gold, as I expect.
By the way, if my suspicion that the gold redemptions were made by Authorized Participants in order to obtain physical gold (for price suppression purposes) is inaccurate, then it would be true that the redemptions were made to satisfy strong investor demand. This alternative would confirm continuing strong demand for gold, which is the exact opposite of investors getting out of gold. Either way, the implications of the declines in GLD’s gold holdings were misreported by the mainstream media.
The gold and silver markets have been extremely volatile thus far in 2011. They will continue to be volatile – probably even more than we have experienced in the past month. We may not have seen precious metals at their 2011 lows, but I expect we are getting closer to the days of sudden large jumps.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Mich., and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com/. Other commentaries are available at CoinUpdate (http://www.coinupdate.com/). He also writes a bi-monthly column on collectibles for The Greater Lansing Business Monthly (www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com/).
 | By February 01, 2011 |
Since Dec. 21, the GLD gold exchange traded fund (ETF) has disposed of 2.2 million ounces of its physical gold. This is an acceleration of the trend where GLD has reduced its gold holdings by 3.2 million ounces over the past seven months.
On Jan. 25, GLD unloaded approximately 1 million ounces of gold, which was almost 2.5 percent of the fund’s entire gold position!
There are only two reasons why the GLD exchange traded fund would reduce its gold holdings. The minor reason is that it could sell of some of its gold in order to pay ongoing expenses of the ETF. The major reason is that shareholders have submitted a minimum of 100,000 shares to redeem them for approximately 10,000 ounces of physical gold.
Private investors are not allowed to contact GLD directly to turn in shares for physical gold.
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Instead, they are required to go through one of 16 Authorized Participants. In the process, the investor turns over 100,000 or more shares to one of these Authorized Participants, who then creates a “basket” for the receipt of the physical metal when they submit the share for redemption. Naturally, the investor has to pay a fee for these services.
Authorized Participants include subsidiaries of Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Merrill Lynch, Morgan Stanley, Republic Bank, Scotia Bank and UBS, among others.
Since GLD began operations in 2004, it has experienced 1 percent or more daily declines in its gold holdings only 41 times. Declines of 2 percent or more are extremely few. Declines of 1 percent or more have almost always been associated right at or clustered around important lows in the gold price. Daily declines of 2 percent or more have a 100 percent correlation with the price of gold reaching a major low.
The last two times that GLD has dispositions of 1 percent or more of its holdings were on July 28, 2010, and Oct. 7, 2010. The first of these instances was the very lowest gold price during the summer of 2010. The second occurrence happened after the price of gold reached an all-time high. Gold again set another all-time high just a few days later.
When GLD gold holdings fell 2 percent on Sept. 9, 2008, it was followed by a 30 percent rise in the gold price.
Past performance does not guarantee future results, but I think there is a logical explanation of why this correlation occurs. I don’t have the data to prove or disprove this, but it is quite possible that the large dispositions by GLD may be initiated by one or more Authorized Participants themselves, who are desperately seeking physical gold to use to help suppress gold prices. Accessing gold by this means would be considered a last resort because the information on the decline in the ETF holdings would be reported to the public. Price suppression would be more effective if the gold could be surreptitiously acquired from central banks or from leases.
Obtaining physical gold from an ETF could also explain why gold prices invariably rise after such a move. Smart investors would realize that such a step indicates a severe shortage of physical metal and move in to make quick profits by squeezing the short sellers.
You might think that good reporters would be eager to investigate the reasons behind these sudden daily declines in GLD gold holdings, but you would be wrong. After the large disposition last Tuesday, Alix Steel of www.thestreet.com wrote that the GLD sell-off was related to investors dumping their gold holdings (note: I am not denigrating Ms. Steel’s overall work; she was kind enough to quote me in another story she wrote on Jan. 27). That interpretation was echoed in at least two stories posted by Reuters. These reports totally miss the mark. Investors getting out of the gold market would simply sell their shares of GLD, not arrange to redeem them to take physical possession of the gold.
However, mainstream reports that the decline in GLD holdings somehow represents declining investor interest in gold could have the effect of scaring some existing gold owners into selling and deter some potential buyers against making purchases. But such stories would likely only have a short term effect if there really is a continuing bull market in gold, as I expect.
By the way, if my suspicion that the gold redemptions were made by Authorized Participants in order to obtain physical gold (for price suppression purposes) is inaccurate, then it would be true that the redemptions were made to satisfy strong investor demand. This alternative would confirm continuing strong demand for gold, which is the exact opposite of investors getting out of gold. Either way, the implications of the declines in GLD’s gold holdings were misreported by the mainstream media.
The gold and silver markets have been extremely volatile thus far in 2011. They will continue to be volatile – probably even more than we have experienced in the past month. We may not have seen precious metals at their 2011 lows, but I expect we are getting closer to the days of sudden large jumps.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Mich., and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com/. Other commentaries are available at CoinUpdate (http://www.coinupdate.com/). He also writes a bi-monthly column on collectibles for The Greater Lansing Business Monthly (www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com/).
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