Gold ETF Reaches One Dollar Per Tonne

The SPDR Gold Shares ETF (GLD) reached a milestone of sorts yesterday as shown below. For every dollar of the gold price there is now one tonne of gold in the trust.
As might be expected, this has much more to do with the price of gold than with changes to the inventory, at least at first glance.

After the "tonnes in the trust" made new highs over the last month as the price of gold was surging, passing the Bank of Japan as the world's lucky number 7 holder of the yellow metal in the process, there has been precious little selling despite the gold price dropping more than $150 as shown below.
That's kind of odd when you think about it, particularly in light of what's been going on in the stock market lately where stock mutual fund redemptions in retirement plans are being credited with accelerating the decline in equity markets.

For gold, the price goes down, but investors don't sell.

Comments

[Bron Suchecki:]

In my experience with the Perth Mint, your observation that investors don't sell when the price goes up is not unusual, particularly with individual/retail investors. New highs in the price drives buying, but selling is a lot more sticky.

2008 Oct 23 07:04 AM

[freefall51:]

I would suspect GLD is sitting on a lot of gold inventory and even gold receivables that deflate rapidly. They may speculate that the price will come back anytime soon and hold, while selling now may potentially lead to losses.

It is probably harder to actually move the gold than the price, since the gold trust cooperates with certain selected but unnamed partners to reddeem shares in baskets of 100 000 shares. How that process of redeeming works and what triggers it is not clear. At least it was at least not disclosed in GLD's last 10Q report.

GLD seem to have a large liability of redeemable shares on their balance sheet, which also seems to be under balanced by the gold assets valued at their historical prices. On that basis the equity of this trust is negative with a strong tendency to deteriorate. There may be still some unrealized gains left, which are not on the books. To capture those GLD would have to hurry and sell. I wonder what will happen if gold prices further drop and the shareholders of GLD - remember that is a trust and not all gold - are heading for the exits. And there is limited access to the trust to redeem shares. But thats just me.

2008 Oct 23 08:47 AM

[hihosilveraway:]

the previous poster has some key words or inaccuracy. "triggers" - there is nothing that triggers redemptions. not revealed in 1st quarter report -- UMMMMMMM, EVER HEAR OF A PROSPECTUS??? me smells a rat, and believes previous post is an attempt at an intellectual hatchet job, and not done very intellectually. i suggest poster go to getabrain.com and invest there first, then buy GLD, and even moreso, SLV.

2008 Oct 23 09:32 AM

[bearfund:]

freefall, the prospectus describes the process perfectly well. Redemption (and creation) is a shares-for-gold process and can be initiated at any time by any of the large brokers willing to pay a fee and deal in whole baskets. This is the arb mechanism by which the price of the shares theoretically tracks the inverse of the value of the dollar. There's no "trigger" other than a dealer's desire to turn a quick profit selling the shares into the market and giving the trust gold in exchange. In other words, issuance of new shares actually means the trust's holdings are growing.

Whether the amount of gold physically located in the trust's vaults would buy the number of dollars represented by the trust's market cap is a fine question to ask, but if the answer is no then, beyond small premiums/discounts, the reason is fraud. The design of the trust seems quite reasonable and if all the players are acting properly there should be no problem.

But the prospectus and common sense say one thing and the market is saying another. GLD is "paper gold" and it's trading like paper gold. A year ago one could obtain about 103 ounces of paper gold (or about 1042 shares of GLD) for 100 ounces of physical gold. Now, one can obtain about 115 ounces of paper gold for 100 ounces of physical. And no one wants to make that trade so the spread continues to widen. Most if not all buyers of paper gold today are paying not in physical but in dollars, and are doing so because their efforts to sell those dollars for physical gold have been frustrated by nonexistent supply.

2008 Oct 23 10:14 AM

[jetsby10:]

nearly everyone seems to be out of the yellow metal and everyone actually is out of it's brother, Silver. This is extremely odd and I have no clue what to make of this situation.

2008 Oct 23 11:02 AM

[OilyGasMiner:]

Funny how everyone seems to be out oakman, but the price is still so low. I strongly believe we are waiting on a significant market correction to occur. Merrill has indicated that they see gold going to $1500 within the next few years. At first I thought that this what's very far fetched , but the more and more I examine the turmoil in the market. The more I believe that their projection will come to pass.

2008 Oct 23 11:12 AM

[HBWOW:]

Yes, based on the world economic conditions, gold should be at least
$1,000 BUT the market for gold and silver is being manipulated by the cash cow countries whose printing presses are running overtime like the USA but have very little gold reserve in relation to their fiat paper. They bolster the dollar (as they hold tons which if they didn't the price of gold would be $2,500 plus) and drive the price of gold down to pick up more gold and gold mining stocks daily. Manipulation of American stocks also enables them to make daily gains at the cost to middle American investors, the major supporters of the American economy.
I only hope that our gold reserves are still intact.

2008 Oct 23 11:54 AM

[mark mchugh:]

Tim,

I really appreciate all the gold commentary you write, but until the US Mint starts producing gold, silver and platinum coins "in quantities sufficient to meet public demand" (like they are required to by law) Gold will be a losing trade.

KITCO is completely out of coins now. They have only two products left:
1000 oz Silver Bars (at around $10,000)
400 oz Gold Bars ($286,000)

https://online.kitco.c...

Of course, they still have their gold and silver pools (swim at your own risk). Oh, and they still are experiencing shipment delays (because they are sooooo busy).

2008 Oct 23 02:20 PM

[Asset Currency:]

Mark,

Note that GoldMoney sells 100% allocated metal in any size increment for a little over spot and the gold has added utility by the ability to be used as a form of payment outside the credit-based banking system (if the need should arise). You might want to check them out:
goldmoney.com

2008 Oct 23 02:57 PM

[mark mchugh:]

Asset Currency,

Thanks, I did check them out a while ago, and if I understand correctly, they will not allow me to take physical delivery.

But the point I am trying to make is I want physical precious metals, at very close to market price, directly from my government, because it's the law.

Clearly, the government is complicit in the suppression of the gold price (and that effects every gold investor). In my opinion, the best way to end the manipulation is to force the government to sell gold to people like me and you, at the bogus prices the Comex and LBMA set.

2008 Oct 24 12:45 AM

[NOWHEREMAN:]

GLD, to be sure Read the Prospectus, But before you get giddy, read the Disclaimers. Then come back and tell me whether you are still Giddy. The Prospectus is supposed to provide you with the Prospect Of Failure as well as success. It is not called a Red Herring for nothing.

2008 Oct 24 12:49 AM

[vic and dave:]

What does this mean. For every dollar of the gold price there is a ton of gold in the trust? This would mean that there should be 2000 lbs/ton x 16 oz/lb x $700 (current gold price per oz) or a mkt cap of 22.4 million in GLD. But the market cap is 190.4 million shares x 72.21 (share price) or approx 13.7 Billion mkt cap. So do they have only 22.4/137,000 gold bullion per share value???

2008 Oct 25 07:59 PM