Some commentators on precious metals markets focus a lot of attention on the statistics about bullion holdings that are reported by the various ETFs. Just yesterday, for example, there was an article at Reuters warning about the declining bullion holdings of the SPDR Gold Trust (GLD), which happens to be the largest gold ETF in the world, holding more gold than most sovereign nations. Their total bullion stocks supposedly fell to a 7 month low of 1,272.682 tonnes on Jan 5, 2011.[i] This fact apparently shakes up a lot of investors, who shiver in their boots every time the total holdings of the various gold ETFs drop.
Assuming that the ETF actually holds real gold bullion[ii], when GLD expands it is very meaningful. It means that a certain amount of gold bullion has been removed from the marketable supply, thereby tightening the market and causing prices to be pressured upward. However, the fact that the ETF may shrink actually means nothing in and of itself. This is because we do not know why its holdings have contracted.
The shrinkage could be the result of a lower interest in owning gold and that would be bearish. However, this is unlikely given that the physical gold market is booming even at today’s historically high prices. More likely, major shrinkage of GLD often represents the actions of a large hedge fund or bank with a sufficient quantity of shares to qualify for the withdrawal of a so-called “basket of gold,” upon demand. In that case, shrinkage of the ETF is bullish. It means that someone has decided that it is cheaper or safer to store his gold outside the trust. The gold would be offloaded from the fund, taken out of the general market and put into long-term storage from which it may not emerge for many years.
Given that there has been no slowdown in the physical market for gold, I would venture to guess that the shrinkage of GLD over the past seven months is the result of several banks and/or hedge funds removing their gold. That would tend to make the action bullish for gold in the long run.
[ii] A lot of very paranoid people have made what seem to be, frankly, rather credible arguments that GLD is operating on a fractional banking basis, holding, perhaps, in reality, 10% of the bullion it claims to hold.