SPDR GLD ETF Unloads 79 Tons of Gold - Should Investors Follow Suit?

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 |  Includes: DBP, DGZ, GLD, IAU
by: J. Christoph Amberger

And so it begins. The SPDR Gold Trust (NYSEARCA:GLD), the world's largest gold-backed exchange traded fund, reported that it sold more than 10 tons of bullion this past Tuesday. That corresponds to 1.7 percent of its total holdings.

SPDR now holds "only" 631.2 tons of gold, down from 641.93 tons on Sept. 8. The trust has sold 68.7 tons of gold since its holdings hit a record 705.9 tons two months ago. The current level is still up from the 627 tons reported for December 2007 -- when gold was trading in the $860 range... a solid $100 above today's median price.

The sale of gold through the SPDR Gold Trust should not be underestimated. Even at its lower Dec. 2007 levels, the fund held more physical gold than China, the Netherlands, and the European Central Bank. It has more gold than Russia, the Bank of England, and Saudi Arabia. In fact, the difference between the gold reserves of the Bank of Japan and GLD in December was a measly 130 tons.

Let's do the math: GLD purchased 79 tons of gold between Dec. 2007 and July 2008. That corresponds to the total gold reserves of Australia or Kuwait. That demand is now gone from the market.

In the last two months, the fund has liquidated 74.7 tons of gold... the equivalent of Egypt's total reserves.

And just Tuesday, it pumped 10 tons into the market. According to the Reserve Asset Statistics of the World Gold Council, that corresponds to the combined reserves of Canada, Mexico and Bahrain.

And GLD is just one gold-backed ETF.

In the past, I have liked to point to the introduction of exchange-traded funds linked to gold as a major new catalyst for new gold demand. In fact, it was mainly demand from fund investors -- not even coin-hoarding gold bugs or jewelry buyers -- that was driving the gold price up. The fund first listed on the NYSE in 2004... are you seeing a pattern emerge?

Its original price was based on the price of 1/10th of an ounce of gold. The current spot price of $756.10 would thus correspond to a share price of $75.61.The fund closed at $74.22 on Wednesday, and after-hour trading indicates further downward pressure at a share price of $73.84.

What is the downside? Let's look at the inventory: GLD only has 4 more tons of gold than it had at the beginning of the year. Gold is now trading $50 below its early January price level of between $850-930 per ounce. Which means the YTD excess inventory is held at a loss...

With a major gold purchaser having turned into a major seller of physical gold, there is now a severe disturbance in the supply-demand ratio that supported the bull run of the past four years. On Aug. 5, when I posted my article "Gold Price Plunges: Might as Well Hold Stocks" on SeekingAlpha.com, I wrote:

"Oil's downside by now has been pegged at $110 and even $70 per barrel, that's 26% or even 50% below its record high. For gold, a synchronous decline would result in prices around $750 or even $500 per ounce. It seems unlikely. But, since my gold bug friends brought up the Carter Administration... history not only documents straight increases -- but horrendous drops far larger than that, all within the last three decades."

A Commenter responded:

"As for gold at $750 and $500, those aren't support points on any chart I've seen. The Gold support points I have are $850 (very strong), $800 (weak) and $650 (Herculean strong)."

As we're closing in on $100 oil and $750 oil, those Herculean strong points are not quite looking quite as untouchable any more. After all, Hercules, too, fell prey to the painful revenge of the centaur Nessus.

And GLD still has all the gold in China to liquidate...

Disclosure: None