Owen

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

Why the rush, Diamond Lou? Wait eight weeks and make gold sellers pay you to take the stuff off their hands!

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

The GLD ETF has no discretion as to its purchases and sales of physical gold. Whenever new investors in the fund bring in physical gold in return for Creation Units of the fund, their inventory grows, and when investors redeem shares for the physical commodity, inventories shrink, as they have recently. In fact, StreetTRACKS Gold Trust ETF ("GLD") doesn't really buy or sell gold; all they're allowed to do is exchange gold for Creation Units, or blocks of 100,000 shares of the ETF. (If this surprises you, it is only because you've never read a prospectus of an ETF--any ETF!)

In recent weeks, a local shortage at some jewelers created a small discrepancy between the price of gold on the commodities exchanges and the price at physical gold distributors, e.g. coin dealers. James Conrad, here on Seeking Alpha, quickly came up with a major conspiracy theory claiming all non-physical gold is fake, and precious metal exchanges are one big scam.

Arbitrageurs, however, knew better and jumped in to cash on this discrepancy. They bought shares of GLD, then redeemed 22 million of them for 2.2 million ounces, or 68.7 tons of physical gold, which they have already sold to jewelers, mints, and panicking people convinced of the impending demise of all financial systems. The profit, after redemption fees, was not big in money-manager terms, but it was risk free, which is what arbitrage trading is all about.

Whenever mass hysteria hits the market, it is those with a rational head on their shoulders who make the most money.