By Jared Cummans
The SPDR Gold Trust (NYSEARCA:GLD) is by far the largest and most popular commodity ETF in the world. The physically-backed gold fund has more than $74 billion in total assets and sees more than eight million shares trade on a daily basis. Not only is it the most popular commodity ETF, but it is also the second largest ETF in the world, and even briefly held the first place slot in 2011. But for all of the recognition and press this fund gets, few actually know how the fund holds its physical gold, which may be some of the reasons that controversy has emerged surrounding this product.
Below, we take you behind the scenes of GLD and how it handles its gold bullion.
To understand the creation process of this fund, let’s start with the authorized participants (AP). These are the only entities permitted to create and redeem shares of the fund, and this must be done in blocks of 100,000 shares at a time. This group of shares is known as a basket. The primary reason for this process is to create inventory for the secondary market so retail investors can buy and trade the product.
To begin creation, the AP calls in order to BNY Mellon, the trustee of GLD. From there, the AP must deliver London Good Delivery (LGD) bars of gold to GLD’s trust, held by the trust custodian HSBC. LGD bars must contain 350-430 troy ounces, but most often appear in the form of 400 ounces, and be a minimum fineness (purity) of 995 parts per 1,000 (99.5%).
Each AP must establish an account with HSBC in order to create and redeem shares of the fund. As far as the creation process is concerned, the AP must transfer physical gold from HSBC to the trust’s account in exchange for baskets of shares. Once gold is transferred to the trust, it is wholly owned by the trust and no other party can make a claim on that bullion, ensuring the safety of GLD’s gold. The trust only holds 100% allocated gold and that gold is never traded, leased or loaned.
After the trust confirms receipt of gold from an AP, which typically takes three days, the trust issues baskets of shares to the AP. From there, the shares can be issued to the secondary market, where you all can buy and sell the fund at your will.
The redemption process is the same as creation, just in reverse. The APs buy back shares on the secondary market and deliver them to the trust, taking physical possession of gold in exchange for one or more baskets of shares. Only the APs can redeem shares from the trust.
Detailing the ins and outs of GLD may be comforting to some, but there will always be those who pick apart the process and find places to insert conspiracy theories. As we have written in previous articles, we cannot outright prove whether or not GLD is a fraud, but given some of the high profile billionaires who are currently invested and its massive asset base, it seems that markets are perfectly comfortable using this fund.
Disclosure: No positions at time of writing.