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LAWRIE WILLIAMS: Top gold ETF setting the price agenda

Follow the gold price and follow GLD – the SPDR Gold Shares ETF, by far the world’s largest gold ETF.  As we suggested it would yesterday, after the days’ decent rise in the gold price, GLD added another 5.94 tonnes of gold into its holdings – making a total of 15.74 tonnes over the past three trading days.  There had been worries that GLD inflows had been turning down – and the ETF’s holdings at 969.97 tonnes are still well below their recent peak of 982.72 tonnes reached on July 5th in the initial uncertainty period after the Brexit vote in the UK.  With the gold price showing some weakness as the initial knee-jerk impact of Brexit faded, GLD followed suit, but looks as though it may be on the way back again.  Overall this year GLD has added a massive 327.6 tonnes of gold into its holdings – a little over 10% of estimated total global new mined gold output. 

There are of course some out there who doubt that GLD holds the amounts of physical gold it says it does in terms unencumbered physical metal – in other words some suggest that at least some of GLD’s holdings may be in the form of gold to which others may also have title.  Others suggest perhaps some holdings are in paper gold for which GLD may not yet have taken delivery of physical metal, given the apparent tightness in such unencumbered physical gold supplies in London where the GLD gold is held.  There is a possibility, perhaps even a likelihood, that there’s an element of truth in the latter given an almost certain time lag between investment intake and actual gold delivery into GLD’s own holdings in the London vaults, but this would be a natural element of the gold trading pattern. 

We personally believe that the overall GLD figures are accurate and there is no attempt to deceive here and indeed the integrity of GLD’s management in the World Gold Council in London, which devised the ETF in the first place, and State Street Global Advisors in the U.S. which markets and manages it, is beyond doubt.  It is somehow unlikely that some of the world’s billionaire investors and huge institutions which hold investments in GLD would do so if there were any doubts as to its probity. 

Thus GLD intake and sales is something of a guide to where the gold price is headed.  It is notable that GLD holdings indeed fell hugely over the period of the yellow metal’s principal falls between the end of 2012 and the end of 2015.  Indeed the huge amounts of gold sold out of the world’s gold ETFs over that period – around 700 tonnes from GLD alone – has been seen as the primary cause of the gold price weakness over that time.

Those analysing gold supply and demand will point to a big fall this year in Asian demand, notably in India and China which may have more than countered the rise in the gold ETFs.  But it is still investment demand in the West, and in the US in particular, which appears to have most relevance in terms of gold price setting.  It should be recognised that during the period when the gold price was falling sharply, Asian gold demand was at huge new record levels, but had little impact in terms of halting the price decline.  At best it may have slowed the rate and depth of the gold price fall a little.  So it is now, but in reverse.  Rises or falls in gold ETFs are currently usually precursors of similar rises or falls in the gold price on a day to day basis.  Others may step in and try and control these given potential losses on short or long calls in gold, but overall the big gold ETFs are setting the price agenda , and GLD as the biggest of all is particularly relevant here.  As we said at the beginning, but in reverse order, follow GLD and you’ll likely be following the direction of the next moves, positive or negative, in the gold price.

03 Aug 2016 | Categories: Gold

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