Does GLD Inventory Affect the Price of Gold?

Do the inventory changes at the SPDR Gold Shares ETF (GLD) have anything to do with the price of gold? Dunno. But, it sure does make you wonder sometimes.

Note that the last time huge numbers of GLD shares were created, resulting in big increases to the number of "tonnes in the trust" (see blue circled area on the left in the chart above), the gold price was in the process of finishing up a little "wedge" pattern that was followed by a sprint to the $1,000 mark.

That was back in December.

Today, a similar wedge pattern has developed and, recently, there have been some big additions to the trust - a net increase of 44 tonnes in just the last month, enough to allow the world's most popular gold ETF to reclaim the #8 spot in the world gold holdings from the Dutch.

The next few months could be very interesting.

Comments

[EE]

Did everyone but the author read Ted Butler yesterday and thus not bother to respond to this article? butlerresearch.com TIGER BY THE TAIL

[JE]

If the U.S. has 8,000 tons of gold why won't they let anyone inventory it?
And while were at it why is there such a lack of interest in market manipulation of gold and silver prices. Ted Butler andJason Hommel are very vocal about this and they receive almost no press.

[Arthur Cutten]

Thanks for this.
What is the source for the March 2008 number on official gold reserves?

[Arthur Cutten]

Thank you for this analysis.

What is the source/reference for the March 2008 official gold reserves?

[Arthur Cutten]

Thank you for this analysis.

What is the source or reference for the March 2008 official gold reserve holdings?

[bowman711]

I forwarded Ted Butler's article to my two Senators; have you?

[EE]

not yet, but will. sent it to mgmt of all my penny stocks even if not in mining.

[User 30121]

To: User 52095: Terrific insight! The reason, I believe, that there isn't any outcry regarding precious metals manipulation, except for the likes of Butler and Hommel, are because the goverment and the crooks on Wall St DONT WANT YOU TO KNOW WHAT THEY ARE DOING, PERIOD! What else can it be?

I can only implore you to BUY and HOLD gold and silver, to offset the economic devastation that is coming VERY SOON.... When the DEMS win, the unravelling will begin. That last sentence was not designed to make a political statement, merely an assessment of what IS to be!

[fran]

BOWMAN711--


my senators are Clinton and Schumer. get serious.

gold and markets are not liberal subjects. there are no votes to pander there in.

[bluehorses]

Well, where does anyone predict gold will be on January 21, 2009? Will is be above $1,075/oz.?

[bearfund]

Bluehorses, speculating on such volatile instruments on that time scale seems all but impossible to me. It's difficult enough to know how much money Federal Reserve Notes will be worth tomorrow morning, much less 7 months from now.

Options on GLD are nifty but of very limited value. Based on the number you're asking about, I assume you're considering some sort of call position. But gold calls in particular seem pointless to me. If you're long the metal then writing calls against it is silly; you're holding it because you don't want to hold anything else or because you fear hyperinflation or collapse. The last thing you want to risk is having your gold called away for some worthless paper right when you need it most. It's like writing a call on an insurance policy. Likewise, owning calls doesn't make much sense to me because all the most bullish theses for gold imply extreme counterparty risk in derivatives markets. You may hold a call "worth" 100x as many dollars as you paid for it only to find when expiration day rolls around that there is no way to collect.

If I wanted to use options to speculate on gold, I'd write deep in the money puts. But that ties up a lot of capital, and that capital is going to be eaten away by inflation while you wait for the option to (hopefully) expire worthless. You'd be better off just buying a futures contract on margin and letting inflation work for you by eating away at your debt while your asset (hopefully) grows in value.

Frankly, I don't care for any of these strategies. There are two uses for gold. First, it's money, a reliable emergency savings account that in exchange for not paying any interest will protect you against disaster. Second, along with better-quality currencies like (today) AUD, NOK, CHF, and, if you can get it, CNY, gold is a good way to denominate part of your uninvested cash when real interest rates on dollars are negative.

There are plenty of chartists who claim you can make a lot of money trading gold on technicals. The volatility is certainly there but it always seemed to me that it is mostly driven by external shocks. Looking at the original question posed by the author, sure enough there's another pennant forming up. But which way will it resolve? I don't know...but I do know which way it would resolve if Israel bombed Iran or the Fed had raised rates. I'd rather not roll the speculative dice on 7 months that will include a US presidential election, the confirmation or refutation of the recession thesis, an end to major bank write-downs or fresh bank failures, and Congressionally-mandat... CFTC rules changes. Instead, the macro trends that have me bullish on gold are firmly in place and no short-term event, however dramatic, will change them by itself. Will I reduce slightly on spikes? Yes. Will I add on dips? Yes. But I'm not going to place short-term directional bets and I'm never going to be without my core physical assets. Anything can happen out there, and usually does. To each his own, of course, but understand that any answer to your question is no better than flipping a coin.

[Bron]

I'm a bit wary of reading too much into changes in GLD holdings over the short term because of the inherent lack of transparency in the gold market. As most gold trading is over the counter (OTC) and not all done on a nice visible stock exchange, you can't be sure that positions in GLD are not offset in other markets.

The GLD (or any ETF) redemption/creation process involves costs, so it is more profitable for market makers in GLD to avoid this where possible. For example, where retail investors are selling GLD, the normal (ideal) process is for the market maker to buy GLD from them and sell gold on the OTC spot market. They redeem GLD for physical gold and use this physical to settle their OTC spot sale.

However, if the market maker feels that the sell off in GLD is temporary and retail investor will come back in the future, then they make more profit by holding GLD and avoiding redemption/creation cost. They still have to buy GLD and still sell gold OTC so that they do not have a trading position and any exposure to the gold price, but instead of redeeming GLD, they lease gold in the OTC market and use that leased gold to settle their OTC spot sale. Their long GLD position (asset) is offset by a lease (liability). Considering that gold lease rates are 0.2% there isn't much holding cost with this strategy.

The only time a market maker would then redeem GLD for physical gold is if there is sustained selling over a period of time. In this situation the market maker's holding of GLD would continue to grow. They then redeem and use the gold to repay the lease.

As a result, I feel that analysis of GLD's (or any other gold or silver ETF) redemption/creation flows against the gold price is only realiable if done in time period blocks of a month or more.