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A knack for buying at the bottom
Monday, October 01, 2007
The inventory vs. gold price chart for the streetTRACKS Gold Shares ETF (AMEX:GLD) has been shown here on many occasions previously, but the chart below showing the increase in inventory vs. the gold price is even more intriguing.
Check out those early-September purchases when the price of the yellow metal was under $700. Have a look at the relative dearth of new purchases over the last three weeks as the gold price soared to almost $750.
Why did they buy 33 tonnes as gold moved up $20 (from $680 to $700) but only 28 tonnes as gold moved $47 (from $700 to $747)?
Dunno.
Since the fund buys bullion on the open market in relatively large "baskets" based on demand for their shares (one share corresponds to one-tenth of an ounce), they are free to make purchases whenever they want to, presumably, as long as the inventory tracks the number of shares outstanding.
They seem to have a real knack for buying at the bottom.
Full Disclosure: Long GLD at time of writing.
6 comments:
Tim,
My understanding of the way the ETF manages gold purchases is essentially by providing a group of dealers with an arbitrage opportunity.
Let's say the market price of the shares ($65) exceeds the price of 1/10 oz. gold ($64.85). A dealer can go buy 10,000 oz. spot gold ($6,485,000) and transfer ownership to the fund in exchange for 10 creation units of 100,000 shares which they now sell for $6.5m. They make a small profit on the difference less fees ($2,000 per creation event).
The purchase of gold and the sale of the new shares drives their prices to converge.
Now, if gold investors prefer to buy the shares rather than the bullion then a lot of new units will be created to satisfy demand and keep the prices of the ETF in line with physical.
I think the creation redemption of units (as measured by holdings of GLD, or by shares outstanding) tells you about the relative preference for GLD versus physical.
That should be 1 creation unit in the above.
And in answer to the question you posed - purchases of GLD by investors gave the incentive for them (collectively the dealers in the ETF) to buy physical and issue more shares. It wasn't some precience on the part of the managers.
If you examine their recent 10Q filings you will see that there is enough slop in there between the shares outstanding and the gold holdings that I'd bet they routinely buy when they think the price and conditions are attractive, knowing that they'll use up the new inventory over time anyway.
Thanks Spence - I'll have to have a look at the 10Q - I've never been able to figure out the relationship between the number of shares issued and tonnes in the trust.
BEH - I'm sure you are correct that preference for GLD versus the spot or futures market plays a role in driving changes in the GLD inventory, but I've also understood that they have a great deal of flexibility regarding when and how much bullion they buy and sell for the fund.
I may have missed this in an earlier post, but how do you find that GLD ETF data? Where do they release their weekly purchases in gold (besides when I see it in the press), and delayed by how long?
StreetTRACKS GLD financial data is here.
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