Wikinvest Wire

Outta the way, Switzerland!

Wednesday, March 11, 2009

Yes, I know. In some parts of the internet, they're going on and on about how the gold in the SPDR Gold Shares ETF (NYSEArca:GLD) might not really be there or how it's being double counted or how they're getting gold plated lead bars from China or some such.

To me, it's just fun to watch their stash grow as inventory at the world's most popular gold ETF passes holdings by central banks all around the world. Switzerland, you're next!
IMAGE Soon, GLD will be number six in the world and then it'll be a long way to go in relative termst to catch Italy at almost two and a half tonnes but, at the rate they're going in 2009, that'll happen by this fall. Then it's just a chip-shot away to surpass France.

With net assets of over $33 billion, GLD is already the second largest ETF in net assets according to Yahoo! Finance behind only it's SPDR brother SPY at about double that figure. Somehow, it seems like that gap might narrow rather quickly over the next year or so.

When looking at the change in inventory at GLD and the price of gold, it makes good sense what is happening. Due to global economic slowdown and higher prices since the first of the year, the jewelry business has, for all practical purposes shut down, so investment buying is about all there is these days.

As shown below, once they stopped adding tonnes to the trust, the gold price began to fall.
IMAGE Today's 9.6 tonne addition was the first substantive change since February 19th which, not coincidentally, is when the gold price began to tumble.

There doesn't appear to be any mystery here...


To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.
Full Disclosure: Long GLD at time of writing


TD said...

God help us when the hedge funds decide to liquidate their GLD positions. Hopefully, that won't be for some time.

Support said...

This is an good post. Clearly GLD moves the market, nay, IS the market.

I feel much less secure with my gold purchases, but wiser.

Anonymous said...

when is someone going to say....

I would like an accounting and inventory of gold bullion in the vault please? what a scam. paper gold...

Anonymous said...

You have to feel sorry for the British, Gordon Brown when Chancellor of the Exchequer
sold off Britain’s gold supply when the price was at its low point. And now they are stuck with him as Prime Minister during the financial crisis.


Aaron Krowne said...

The issue isn't really there is no or mostly no gold in the ETF or whether it is fully-backed. No doubt, most of the metal is likely there. The issue is that, based on the fund's own admission, there may be some quantity of gold not present or not auditable.

Gold stored with sub-depositories is not auditable. That is a pretty big red flag in my opinion.

Next, the GLD and SLV ETFs can actually sell their own float short to fund new shares before acquiring physical metal. This means if the fund were to be unable to acquire physical while it had shares short, it would be bankrupt, and all shareholders would be unsecured creditors. Who out there wants to be stuck receiving a 30%, 20%, or even 5% haircut on their GLD/SLV shares?

Ted Butler has written about how it looks a lot like there is not as much buying as there should be on the way up, as the ETFs wait for the price to start going down before buying some of the physical metal they owe to their shareholders. In other words, they are "managing" the price. If this is true, this is not what a passive tracking vehicle should be doing, and goes against the interests of the shareholders.

They admit the mechanics of the above in their own circulars; of course they don't say why they would do such a thing.

Even if GLD and SLV are mostly honest, I don't want to be a part of that system. There is too much opportunity for abuse. They have basically given themselves no rules where it counts the most for owning a stake in physical metal. If you want an exchange-traded fund, there are better vehicles, such as CEF.

Of course, it is a wonderful thing that more people are more interested in precious metals as an investment. It is just a shame the main vehicles for this ownership are so shady.

Anonymous said...

Historical Gold/Oil and Gold/Platinum ratios have been destroyed, and this is interpreted as supporting Gold as an investment?

Or, is this just ignored?

I heard many of these same arguments about house prices in L.A. in 2005, just before I sold my house and moved out of state.

Liquidated Gold at $935. We'll see who's correct later this year.

Tim said...

Does anyone know how much of the 1,000+ tonnes is in the "not auditable category?

On a related note, this is from Ted Butler a couple weeks ago:

"Lately, I’ve noticed quite a bit of suspicion and criticism concerning the legitimacy of the ETF’s, particularly the gold ETF’s, with the criticism centered on whether the real metal exists that is said to be on deposit. I’d like to add my two cents. Quite frankly, I don’t understand this criticism. If someone would prefer to own metal in his own possession or control, they should do so. It’s an easy choice. Certainly, this has always been my advice. And it’s not like the ETF’s are beyond criticism, and I have publicly done so in the past when I detected massive unreported short selling in the big silver ETF, SLV. I think that’s fraud, and I think there is currently a big unreported short position in SLV.

But that’s not what the current criticism of the gold ETF’s is all about. The current criticism revolves around allegations that the metal said to be deposited is not really there, even though serial numbers and weights of all bars are listed. It seems some are claiming that the big quantities of gold flowing to the ETF’s are beyond anything reasonable. Where can all this metal be coming from? While I can’t personally guarantee the metal is in the ETF’s, nor do I wish to, I don’t understand this line of thinking. The gold ETF’s have been accumulating gold for more than 4 years. In that time, roughly 50 million ounces have been absorbed by the all the gold ETF’s. That’s one percent of all the gold in the world. Even if you reduce the 5 billion ounce gold inventory by 60%, and say there is 2 billion ounces of gold in good-delivery bullion bar form, the 50 million ounces in gold ETF’s is only 2.5% of that 2 billion ounces. Is it so hard to imagine 2.5% of anything being accumulated over 4 years and with more than a doubling in price? After all, the silver ETF’s have accumulated almost 30% of total world bullion inventories and little is said of that by gold people.

The fact is, for the most part, the investors who buy the silver and gold ETF’s are institutional investors who probably wouldn’t buy the metal if the ETF’s didn’t exist. You would think the gold analysts criticizing the ETF’s would recognize that. The buying in the silver and gold ETF’s are a very big reason behind the doubling in price in a few years. You would think metal people would be cheering the ETF’s on, instead of complaining. Go figure. Look, I understand that investment demand in mining shares has probably suffered as a result of buying in ETF’s, but that’s a different issue and is no reason to claim that the gold ETF’s don’t have the metal. Metals prices wouldn’t have climbed if there was no metal demand from the ETF’s."

Anon 8:17 - for a very long time I've thought that, with the possible exception of the gold-silver ratio, all gold ratios are meaningless.

Anonymous said...

(From Anonymous 8:17)
Tim, with all due respect, how can the gold ratios be meaningless?

A simple question: How can gold be trading at ~ the same price as platinum and not question the possibility of a bubble (or at least question why platinum isn't higher)?

Gold has decoupled from historical relationships and ratios. You might not be concerned, but I was concerned enough to liquidate completely (there are some good bargains out there right now).

I saw the same thing with housing in L.A. in 2005 and there was a lot of denial then, too. You might be correct, but the probabilities say there is a bubble.

BTW, love the blog!

Tim said...

I look at it this way.
What if the central banks said they were going to sell all their gold and, on the same day, OPEC said they were going to stop shipping oil to the West?
Would the next day's gold-to-oil ratio of 3 or 4 be important?
What if, one day, people around the world lost faith in paper money?
Would the ratio of gold to anything be important?

Tim said...

Actually, there is one area where the gold-to-oil ratio is important.
Since mining is energy-intensive, it is a good predictor of the future bottom lines for gold mining companies.

Anonymous said...

I'm not looking at daily trends, I'm looking at long-term trends and decoupling of historical ratios.

Your points are very valid, but only in the short-term.

Why did oil, platinum, silver and palladium crash in mid '08 (almost in perfect lockstep) but not gold?

For each ounce of gold that I sold, I can purchase (almost) one ounce of (much more valuable) platinum. No matter what else it is, it is very strange.

As for people losing faith in paper money, this is a distinct possibility. However, in such a "Black Swan" scenario why would people accept or use gold instead (and how would you get your gold out of the ETF?)? If fiat currencies fell out of favor around the world, I think basic necessities (food, gasoline, heat, light, shelter) would be more much valuable than gold. Though, perhaps you were not thinking of such a severe loss of faith as I have written above.

Tim said...

No, I was talking about a major change in investors' asset allocations which is what we've seen over the last six or eight months.

Anonymous said...

I agree that there has been a crisis of faith in paper money.

However, if we stipulate that people around the world have lost faith (and continue to lose faith) in paper money, then why aren't other "safe haven" metals (like platinum) increasing along with gold?

Why hasn't the historical price relationship between gold and platinum remained during the flight to safety? Historically, the price relationship (ratio) between gold and platinum has been much different than it is today. Something drastic changed in mid '08. You seem to be saying "flight to safety", while I am saying "bubble".

I think your point (asset reallocation) actually proves my point (gold bubble). Although, I think we are focusing on different things in our responses and might be "talking past each other".

I agree with your premise and your argument. I think where I stray from your reasoning is that I think gold has inflated for reasons other than underlying value (hence, my opinion that it is a bubble). Basically, the price has gone up because many are buying gold for reasons of "safety". If the need for "safety" changes, the price will change - perhaps drastically.

Tim said...

Platinum is not a safe haven metal. It is first and foremost an industrial metal, as is palladium. Silver has been used as money in the past but remains primarily an industrial metal whereas uses for gold are almost exclusively as an investment or as jewelry and many would argue that jewelry is an investment (particularly in India).

I've yet to hear a convincing argument about how you can "value" gold, aside from what it costs to dig it out of the ground, and that valuation metric becomes irrelevant (and a very good reason to own gold stocks) when demand exceeds supply.

To date, the demand for gold has been driven largely as a flight to safety, but the real fun starts after all this money printing, when the "chain catches the sprocket" so to speak, and inflation revs up again.

There is no better arbiter of the quality of your investment decision making than time.

Anonymous said...

"There is no better arbiter of the quality of your investment decision making than time."

Ain't that the truth!

Twain's my favorite writer, so I'll share one of my favorite quotes:

"OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February." - Mark Twain

Anon 8:17

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