Gold ETF Mass Exodus
Author: Adam Hamilton
Posted: January 27, 2012
Gold is enjoying an awesome January, rallying strongly out of its oversold late-December lows. But last month’s hyper-pessimistic sentiment deserves some reflection before it totally fades from memory. One of the core theses of the bears resolutely predicting sub-$1400 gold prices soon was the notion that there would be widespread liquidations in the flagship GLD gold ETF, a mass exodus of capital.
If it indeed came to pass, gold would almost certainly be considerably lower than we’ve seen in recent weeks. But it didn’t, the stock traders owning GLD didn’t panic and rush for the exits as feared. Instead they boldly stood their ground, continuing the long tradition of GLD shares being held in strong hands. GLD’s entire history shows its owners largely want gold exposure for the long haul, they aren’t flighty.
Just as mass-GLD-liquidation fears captured mindshare in past gold corrections, they are certain to once again become popular bearish centerpieces in future ones. So gold investors and speculators alike, whether they own GLD or not, need to understand this mighty ETF’s track record during gold corrections. This critical knowledge will mitigate mass-exodus fears in future gold corrections, reducing the odds of getting suckered into selling low by the bears.
Thanks to wacky conspiracy theorists never ceasing to irresponsibly spout utter nonsense about GLD, it still isn’t as well understood as it ought to be by now. Holding a staggering 1259.6 metric tons of physical gold bullion in trust for its owners these days, worth a colossal $69.3b, GLD is a massive force in the gold market. Its price impact on gold since its birth 7 years ago in November 2004 has been enormous!
GLD acts as an incredibly-important conduit for the vast pools of stock-market capital to easily flow into and out of physical gold bullion. It opened up gold investing to a huge new market, including pension funds, mutual funds, and hedge funds, that never would have gone through the considerable hassles and expenses of buying gold coins. GLD is a frictionless, cheap, and easy way to get gold exposure.
The operational mechanisms of this conduit are easy to understand. When a stock trader wants some gold exposure in his portfolio, he buys shares in GLD. Each share represents 1/10th of an ounce of gold, less a modest 0.4% annual expense ratio necessary to move and store the physical gold bullion and pay the people running this ETF. If there happens to be a GLD seller right then, the shares change hands without anything happening to GLD’s underlying bullion holdings.
But usually there are more buyers of GLD shares than sellers, or vice versa. Remember that GLD’s mission is to track the gold price, so if this ETF’s real-time supply and demand isn’t synchronized with gold’s then their prices will disconnect. In order to avoid failing, GLD’s custodians have to directly shunt excess GLD-share supply or demand directly into gold bullion. They do this as necessary in 100k-share increments, which equalizes differential price pressure and keeps GLD shares synchronized with gold.
Most of the time since GLD’s launch, there has been more demand for GLD shares than supply. If these buyers bid up GLD shares and the custodians do nothing, GLD’s share price would decouple from gold to the upside. To bleed off this excess demand into gold itself, the custodians issue enough new GLD shares to sop up the differential demand. Then they take the capital raised and promptly buy physical gold bullion to put in their vaults that very day. So excess GLD demand shunts capital into gold itself.
But sometimes, and this is what the bears worry about during corrections, GLD-share supply exceeds demand. If the GLD sellers dump their shares faster than gold itself is being sold, this ETF’s price will decouple from gold to the downside. GLD’s custodians must quickly absorb this differential supply. And the only way to raise the capital necessary to buy back the excess shares offered is by selling physical gold bullion. As these funds repurchase GLD shares, excess GLD supply is shunted into gold itself.
So GLD’s holdings, the amount of physical gold bullion it holds in trust for its investors at any given time, are a reflection of the supply-and-demand dynamics of GLD shares relative to gold’s own. Thankfully GLD has been extraordinarily transparent since its debut, publishing its physical-gold-bullion holdings in great detail (down to individual bars’ sizes and serial numbers) on a daily basis. By charting this priceless data, we can better understand how stock traders interact with gold via the conduit of GLD.
This first chart looks at the entire history of GLD’s holdings along with the gold price. The first thing that sticks out is the remarkable growth in this ETF’s gold hoard, it has been wildly popular with stock investors. Note also that GLD’s holdings tend to be “sticky”. Once they grow to any new level, they are rarely sold back down again. GLD’s owners are some of the strongest hands in the whole gold realm.
Full Article
Gold ETF Mass Exodus
Author: Adam Hamilton
Posted: January 27, 2012
Gold is enjoying an awesome January, rallying strongly out of its oversold late-December lows. But last month’s hyper-pessimistic sentiment deserves some reflection before it totally fades from memory. One of the core theses of the bears resolutely predicting sub-$1400 gold prices soon was the notion that there would be widespread liquidations in the flagship GLD gold ETF, a mass exodus of capital.
If it indeed came to pass, gold would almost certainly be considerably lower than we’ve seen in recent weeks. But it didn’t, the stock traders owning GLD didn’t panic and rush for the exits as feared. Instead they boldly stood their ground, continuing the long tradition of GLD shares being held in strong hands. GLD’s entire history shows its owners largely want gold exposure for the long haul, they aren’t flighty.
Just as mass-GLD-liquidation fears captured mindshare in past gold corrections, they are certain to once again become popular bearish centerpieces in future ones. So gold investors and speculators alike, whether they own GLD or not, need to understand this mighty ETF’s track record during gold corrections. This critical knowledge will mitigate mass-exodus fears in future gold corrections, reducing the odds of getting suckered into selling low by the bears.
Thanks to wacky conspiracy theorists never ceasing to irresponsibly spout utter nonsense about GLD, it still isn’t as well understood as it ought to be by now. Holding a staggering 1259.6 metric tons of physical gold bullion in trust for its owners these days, worth a colossal $69.3b, GLD is a massive force in the gold market. Its price impact on gold since its birth 7 years ago in November 2004 has been enormous!
GLD acts as an incredibly-important conduit for the vast pools of stock-market capital to easily flow into and out of physical gold bullion. It opened up gold investing to a huge new market, including pension funds, mutual funds, and hedge funds, that never would have gone through the considerable hassles and expenses of buying gold coins. GLD is a frictionless, cheap, and easy way to get gold exposure.
The operational mechanisms of this conduit are easy to understand. When a stock trader wants some gold exposure in his portfolio, he buys shares in GLD. Each share represents 1/10th of an ounce of gold, less a modest 0.4% annual expense ratio necessary to move and store the physical gold bullion and pay the people running this ETF. If there happens to be a GLD seller right then, the shares change hands without anything happening to GLD’s underlying bullion holdings.
But usually there are more buyers of GLD shares than sellers, or vice versa. Remember that GLD’s mission is to track the gold price, so if this ETF’s real-time supply and demand isn’t synchronized with gold’s then their prices will disconnect. In order to avoid failing, GLD’s custodians have to directly shunt excess GLD-share supply or demand directly into gold bullion. They do this as necessary in 100k-share increments, which equalizes differential price pressure and keeps GLD shares synchronized with gold.
Most of the time since GLD’s launch, there has been more demand for GLD shares than supply. If these buyers bid up GLD shares and the custodians do nothing, GLD’s share price would decouple from gold to the upside. To bleed off this excess demand into gold itself, the custodians issue enough new GLD shares to sop up the differential demand. Then they take the capital raised and promptly buy physical gold bullion to put in their vaults that very day. So excess GLD demand shunts capital into gold itself.
But sometimes, and this is what the bears worry about during corrections, GLD-share supply exceeds demand. If the GLD sellers dump their shares faster than gold itself is being sold, this ETF’s price will decouple from gold to the downside. GLD’s custodians must quickly absorb this differential supply. And the only way to raise the capital necessary to buy back the excess shares offered is by selling physical gold bullion. As these funds repurchase GLD shares, excess GLD supply is shunted into gold itself.
So GLD’s holdings, the amount of physical gold bullion it holds in trust for its investors at any given time, are a reflection of the supply-and-demand dynamics of GLD shares relative to gold’s own. Thankfully GLD has been extraordinarily transparent since its debut, publishing its physical-gold-bullion holdings in great detail (down to individual bars’ sizes and serial numbers) on a daily basis. By charting this priceless data, we can better understand how stock traders interact with gold via the conduit of GLD.
This first chart looks at the entire history of GLD’s holdings along with the gold price. The first thing that sticks out is the remarkable growth in this ETF’s gold hoard, it has been wildly popular with stock investors. Note also that GLD’s holdings tend to be “sticky”. Once they grow to any new level, they are rarely sold back down again. GLD’s owners are some of the strongest hands in the whole gold realm.
Full Article
