What Does ETF Money Flow Tell Us About Gold?

The 1920s and the 1990s both had stock market run ups that were linked to technological innovation and large increases in intangible capital. The dominant view in prior research is that the stock market increases of the 1920s were the result of speculation. An article published in the September 2008 issue of American Economic Review states that these increases were the results of new technology and intangible assets.

Liaquat Ahamed, author of Lords of Finance - The Bankers Who Broke the World, reveals in his book that the primary cause of the 1929 economic meltdown was the decisions taken by a small number of central bankers. Those bankers believed the greatest threat to capitalism was inflation, and the solution was to turn back the clock and return the world to the gold standard.

The table below shows the top 20 ETFs by net assets as of May 31, 2009. It also shows the percentage changes for net assets from March 31 to May 31. Within those 2 months, the SPY price increased by over 16%. However, SPY’s net assets only increased by 1.6%. SPDR Gold Shares (GLD)’s net assets increased by 11.4%, mainly because Gold price increased by 6.6% over the same period. Seems like people moved money out of SPY and into emerging markets such as EEM.

Fund Name	Ticker	Net Assets (May)	Net Assets (March)	% Change
SPDRs	SPY	63.7	62.7	1.6%
SPDR Gold Shares	GLD	35.1	31.5	11.4%
iShares MSCI Emerging Markets Index	EEM	30.8	17.0	80.8%
iShares MSCI EAFE Index	EFA	30.2	23.2	30.1%
iShares S&P 500 Index	IVV	17.7	13.0	36.6%
PowerShares QQQ	QQQQ	13.4	10.3	30.2%
iShares Barclays TIPS Bond	TIP	13.2	10.2	28.9%
iShares iBoxx $ Invest Grade Corp Bond	LQD	11.5	8.7	32.7%
Vanguard Total Stock Market ETF	VTI	10.2	7.6	33.2%
iShares Barclays Aggregate Bond	AGG	9.7	9.7	0.0%
iShares Russell 1000 Growth Index	IWF	9.4	8.0	18.1%
iShares FTSE/Xinhua China 25 Index	FXI	9.3	5.3	74.6%
iShares Russell 2000 Index	IWM	9.2	6.9	33.2%
Vanguard Emerging Markets Stock ETF	VWO	8.8	4.5	96.0%
iShares MSCI Brazil Index	EWZ	8.4	3.9	115.9%
DIAMONDS Trust, Series 1	DIA	7.2	7.3	-1.2%
iShares Russell 1000 Value Index	IWD	7.1	5.8	22.1%
iShares Barclays 1-3 Year Treasury Bond	SHY	7.1	7.3	-3.0%
MidCap SPDRs	MDY	6.5	5.1	27.8%
iShares MSCI Japan Index	EWJ	5.3	4.2	25.7%

Source: Yahoo Finance as of June 11, 2009

According to the World Gold Council (Source), it was estimated that all the gold ever mined totaled 161,000 tons. 19% of that is held by central banks. Annual mine production of gold over the last few years has been close to 2,500 tons and annual demand is around 3,600 tons, which includes jewelery, industry and investment.

The central bankers have powerful tools, specifically their authority to print currency and their ability to marshal their large concentrated holdings of gold. The ultimate goal for a central bank like Fed in a financial crisis is simple: to re-establish trust in financial system.

Last month both Standard & Poor's and Moody raised worries that the United States could lose its "AAA" rating. If potential US government downgrade, supply-demand and North Korea’s nuclear testing could not push Gold above $1,000/oz, I wonder whatever could?

Disclosure: I have a long position in EEM, EFA, QQQQ, SPY and TIP.

Comments

[Donald Ingram:]

One may well wonder. Who knows what the future holds? In our current fragile global economic village, just one more severe shock to the system would be all it takes. Once gold breaks through that psychological barrier and holds position above that level, then all bets are off. No resistance above. Going, going, gone!

Jun 12 09:44 AM

[Spartacuss:]

Inflation, deflation, what a seesaw of possibilities. I am oriented towards deflation based on unemployment, housing and upcoming rather large resets including commercial. Add to that the enormous amount of highly leveraged derivatives...simply massive.

Yet, all the talk is on "greenshoots", I call it "greenspin" from the maestro himself. Don't forget that the classic answer to the unsolvable problem is to ignore the problem...change the subject and paint a rosy picture and don't fight the FED.

I just wish so many of these authors would get away from "technical" analysis and move towards fundamentals, but then since the fundamentals are downright ugly, who wants to hear it? At least with technicals, who is to dispute the classic and mostly worthless statistical approach of deterministic analysis of future prospect as a function of itself, except for the self fulfilling prophecy effect of numerous advocates who live by this stuff.

The other great classic of non solveability is to introduce a bevy of off related material to defocus and blind the masses from the truth.

War, it seems to me is useful for these purposes, however, war with who? Perhaps now in deperation we could equip our congressional people with tasers...now wouldn't that be interesting?
I cannot help wondering who would get it first, Pelosi or Frank?

Jun 12 04:14 PM

[onebir:]

" If potential US government downgrade, supply-demand and North Korea’s nuclear testing could not push Gold above $1,000/oz, I wonder whatever could? "
My guesses: a collapse in the dollar, sharp simultaneous falls in stocks and bonds, &/ real signs of inflation...

Jun 13 08:51 AM

[thinker70:]

The factor not being taken into consideration by most gold bugs is that the bullion banks still have tremendous financial clout and are DELIBERATELY (IMO) attempting to destroy or at least discourage precious metals investors by periodically hammering the price, in fact smart investors with good timing can use inverse ETF's to anticipate their moves.

The monetary establishment recognizes that a rising gold price is a reflection of an increasing distrust of the bankers Ponzi scheme of fractional reserve fiat currency creation that brings our money supply into existence as DEBT that must be paid back with interest that is NEVER CREATED by the system, hence inflation! They KNOW that gold and silver are REAL MONEY and their product is nothing more than an I.O.U. with no intrinsic value and therefore COUNTERFEIT so they naturally VIEW gold as competition that must be squashed by fair means or foul!

Jun 13 09:09 AM

[sluesbox:]

If the World could just get it's hands on that Central bank Gold. That 19%, could easily by sopped up by the mountain of fiat paper. Right now, they're using it to control the price. We need to keep buying @ Market until the Central bank's supply reaches the level that they deem dangerous to the system. Let's see what happens, then !

Jun 13 01:46 PM

[capt Brian:]

Forgetting all the ifs, whereasses, etc,
BUY GOLD BEFORE IT IS TOO LATE!!!!!!!!!

HAVE FUN

Jun 13 02:43 PM

[5142152-337:]

Thinker70: I agree with your comment, in part. And about the timing? That's easy (if you have a wristwatch). Just look at it around 9:30am EST, and watch gold and silver market plummet or ratchet up. Just like clockwork! Try it! Happens nearly on a daily basis...

Jun 13 03:24 PM

[mtt04:]

I have gold and silver moguls in my yard, they were bought as INSURANCE not and investment.

When gold becomes an investment and touters are on TV asking the dumbs dumbs to sell their jewelry I'd say the top is in and time to dig it up.

Wouldn't you? Smells like Nortel in 2000 at 132 bucks to me.

Jun 13 04:42 PM

[cheapybob:]

There are a LOT more US Dollars out there that could potentially refer to be in gold that there is gold to buy. As the worldwide debts mount, they will become more risky investments, and people will worry about thir potential loss of wealth holding them.

I the words of Will Rogers: "I'm not worried about the return ON my investment, I'm worried about the return OF my investment." Returning debased and devalued paper even with interest, isn't a return in my book.

Jun 13 04:45 PM

[Donald Ingram:]

There are some horror stories I have heard about people trying to claim and take delivery of their gold bullion from ETFs.
Check around yourself on different web sites that talk about gold.
Something is definitely not right.
For the past few years now, there has been some concern about the amount of physical gold that ETFs claim they have, compared to the amount of certificates that they have issued.
I really do think that a RUN on holding physical gold has started. The current activity at ETF warehouses and financial service companies that deal with gold bullion delivery, tell me this.
Also, some other 'scuttlebutt' I have heard about gold bullion - since the "trouble" at the Canadian mint missing over $10 million in gold bullion, other depositories around the world are working around the clock on their own audits. Could it be that we don't have as much gold in the vaults as we thought there was?
Wonder how much is REALLY in Fort Knox?

Jun 13 09:49 PM

[realold:]

Tne thing that I have not seen mentioned in blogs about gold that maybe somone can explain? The U.S Mint has stopped producing gold coins, platinum coins and reduced silver coin offerrings due to a lack of supply. What does this mean? The U.S. Mint cannot find anyone who will sell them gold? Is it possible that there really is no gold left out there to buy?

Jun 13 10:53 PM

[Ken P:]

I'm not sure how anybody can take the idea of deflation in the US seriously -- not because things are not bad enough things to cause it, but because the government refuses to let it happen and can always print enough dollars to keep deflation from happening. The real danger is the eventual massive inflation that will result from all those extra dollars.

Jun 14 04:36 AM

[Econ Base:]

since central bankers are not backing their currencies with precious metals, we need to do it ourselves. Read this:
portfolioforlife.blogs.../

Jun 14 11:10 AM

[Ken P:]

In the early 80s gold peeked at around $2500 in today's dollars and yet here we are in the midst of the worst financial crisis since the great depression and can't sustain $1000/oz. A reason for this is that the gold market is being heavily manipulated. The motivation for manipulating prices downward would be to help maintain the illusion that the economy is improving and that nobody is concerned because gold is remaining relatively stable. This discourages people from buying gold and encourages them to invest in equities instead.

One way the gold market can be manipulated is via gold ETFs such as GLD. Many believe that they don't have as much gold as they claim to have and/or that they loan out the gold. Either of these will artificially increase the supply of gold which will tend to depress prices. If they loan the gold out there is the risk of default but the investors don't benefit from this risk and there is nothing in the prospectus that prohibits them from doing that. Also you can short sell GLD which also tends to depress gold prices.

If the government believed there was going to be massive inflation and devaluation of the dollar as a result of the huge debt and printing of dollars then it would make sense to hoard what gold it had and then sell it after inflation takes off. They don't want to mint more gold coins because that makes it easier for people to invest in actual gold (as opposed to the ETFs) which would tend to increase demand for gold bullion and push up the prices, which would be counterproductive.


On Jun 13 10:53 PM realold wrote:

> Tne thing that I have not seen mentioned in blogs about gold that
> maybe somone can explain? The U.S Mint has stopped producing gold
> coins, platinum coins and reduced silver coin offerrings due to a
> lack of supply. What does this mean? The U.S. Mint cannot find
> anyone who will sell them gold? Is it possible that there really
> is no gold left out there to buy?

Jun 14 07:17 PM

[realold:]

Thanks for the response. Your explanation fits and I agree. This also applies to the Krugerand as well? Premiums to buy coins seem very high to me, so I still think that no one, government or private, really wants to sell small quantities of gold


On Jun 14 07:17 PM Ken P wrote:

> In the early 80s gold peeked at around $2500 in today's dollars and
> yet here we are in the midst of the worst financial crisis since
> the great depression and can't sustain $1000/oz. A reason for this
> is that the gold market is being heavily manipulated. The motivation
> for manipulating prices downward would be to help maintain the illusion
> that the economy is improving and that nobody is concerned because
> gold is remaining relatively stable. This discourages people from
> buying gold and encourages them to invest in equities instead.<br/>
>
> One way the gold market can be manipulated is via gold ETFs such
> as GLD. Many believe that they don't have as much gold as they claim
> to have and/or that they loan out the gold. Either of these will
> artificially increase the supply of gold which will tend to depress
> prices. If they loan the gold out there is the risk of default but
> the investors don't benefit from this risk and there is nothing in
> the prospectus that prohibits them from doing that. Also you can
> short sell GLD which also tends to depress gold prices.
>
> If the government believed there was going to be massive inflation
> and devaluation of the dollar as a result of the huge debt and printing
> of dollars then it would make sense to hoard what gold it had and
> then sell it after inflation takes off. They don't want to mint more
> gold coins because that makes it easier for people to invest in actual
> gold (as opposed to the ETFs) which would tend to increase demand
> for gold bullion and push up the prices, which would be counterproductive.
>

Jun 14 09:44 PM

[TERN:]

The AAA (or less) rating refers to the risk of sovereign default on the Treasury bonds.
As long as the US has a central bank that can print money when Treasuries fall due, the risk of default is nil.
The risk for the lenders is receiving devalued dollars.

Jun 15 07:30 AM