Guest Post: Exchange Traded Funds 'Dumping Gold' – Does It Matter?
Submitted by Pater Tenebrarum of Acting-Man blog,
Gedankenexperiment
Imagine the following: you read in a newspaper that a group of investors has sold US dollars to the tune of $820 million over the past two months for other currencies. This incidentally represents approximately 0.082% of the broad dollar money supply TMS-2 (which amounts to roughly $9.3 trillion at present). It means they would have been selling roughly $20 million per trading day. You then learn that $4 trillion of US dollars are traded in global currency markets every single trading day. Would you believe that their selling has influenced the exchange value of the dollar beyond a rounding error?
And yet, we are supposed to believe that the selling of an equivalent amount of gold from the gold holdings of exchange traded funds over the past two months (they have sold 140 tons, or 0.082% of the total global gold supply) has greatly influenced the gold price.
According to a recent press report:
“Exchange traded funds have transformed the gold market. Since the first fund was launched nearly a decade ago, the products have become so successful in offering a simple way for investors to buy physical gold that they have acquired the nickname “the people’s central bank.”
But what happens when the people’s central bank decides to sell?
That is the question now haunting the bullion market. Since the start of January, gold ETFs have dumped 140 tonnes of gold. February saw the largest monthly outflow of gold from ETFs on record.
The sell-off is partly a reflection of broader negative sentiment towards gold, as investors become more confident in the global economy and put their money into riskier assets such as equities. Prices have slid 12 per cent since October to less than $1,580 (U.S.) an ounce, and are down 18 per cent from their record nominal high in 2011.
But the shift to selling by ETF investors is a concern in its own right for the gold market.
“The acceleration in gold ETF outflows is worrying,” says Joni Teves, precious metals strategist at UBS. Suki Cooper, analyst at Barclays in New York, describes a continuation of the current selling trend as “the key downside risk for prices.”
The reason is that ETFs have become a major presence in the physical gold markets.
Since the first gold ETF was launched in Australia in 2003, the products have become enormously successful. The funds offer investors a relatively low cost and easily tradable way to access physical gold by holding gold in a trust, which then issues shares that can be traded on an exchange.
With some 2,491 tonnes of gold held around the world, collective ETF holdings outnumber all but two central banks: the U.S. and Germany. ETFs hold enough gold single-handedly to supply the jewellery market in India – the world’s largest consumer of the metal – for more than four years.”
(emphasis added)
Sounds real scary, right? However, the only sentence above that is in any way meaningful is this one: “The sell-off is partly a reflection of broader negative sentiment towards gold.”
How the Gold Price Forms
That is all it is: a reflection of sentiment. The tonnages traded and the fact that ETFs could theoretically supply “Indian jewelry demand for four years” are more or less irrelevant. What India consumes in jewelry in four years is the amount of gold traded in London alone on three or four good days. Since all the gold that exists is always held by someone, the total demand for gold is at any moment equal to its total supply: it amounts to 170,000 tons. 140 tons sold by ETFs in two months are like a drop in the ocean.
As Robert Blumen has explained in great detail in an article we have published here a while ago (“What Determines the Price of Gold?”), the decisive factor for the gold price is neither mine supply, nor scrap supply, nor jewelry demand, and by extension, also not the supply provided and the demand exercised by ETFs. Instead it is the reservation demand of the current holders of gold that is the most important factor determining the price of gold.
So how can we, given these facts, make educated guesses as to where the gold price will head, or whether gold is presently over- or undervalued? To this end one must use indirect means, namely one must consider the fundamental drivers that are apt to induce gold holders to either lower their selling price or hold out for a higher one. We have discussed these in previous articles, so won't go into these details again here. See “Gold Still Misunderstood”, “Precious Metals, an Update”, “Some Thoughts on Gold Part One and Part Two” for a discussion of these drivers and how to properly analyze gold.
Having said all that, we want to briefly return to the use of ETF inflows and outflows as a sentiment indicator. It is true that a persistent continuation of such outflows would be a worrisome sign, as it would indicate waning investor interest in gold. Although the amounts concerned are too small to matter for the gold market, the ETFs are a reasonably good microcosm of the sentiment toward gold. However, experience has shown that large outflows in the very short term are often a contrary indicator. The ETFs tend to be the last entities where selling materializes, and selling in size is often seen near the end of short term downtrends. Should the holdings of gold ETFs stabilize here and inflows resume, we would have confirmation that investor sentiment toward gold is once again improving. It is solely in this sense it is useful to monitor these flows.
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Paper gold is still paper. Buy phys.
I dont believe it
This should be a warning sign for gold investors...this is informed big money exiting these vehicles before the paper/bullion fraud exposure becomes toxic....they are not going to be bagholders for the paper ponzi. Soros was the first big player out of GLD...
Soros and Buffet amongst other "patriots" are exiting stocks en masse.....should I leave stocks too? it's all manipulated shit. I'm buying land and hard assets.
Be sure to avoid urban developments and focus on holding large tracts with fresh water, trees but not too far from other people, IMHO.
The real question is how/when ETF's will release their huge volume of smoke and vast inventory of mirrors into the marketplace.
I can see spot run down to $1000 but with a $2000 street premium on physical or thereabouts (or some other unimaginably garish dislocation of the current scheme). Let the pundits punditate on Iran when 401k eats shit and dies, let Rand Paul bloviate about flying monkeys while the wicked witch prints away wealth.
I'm surprised I'm the first one to post this. According to the bylaws of GLD, if you buy a large enough position, you can close that position out in physical gold. In the absence of a functioning futures market, this is the only sure fire way to obtain physical gold in size.
Might explain why the gold is leaving GLD.
True. It seems the logic of the article is 180 degrees out of phase. THis is bearish for goldish paper, and bullish for real physical.
I can only hope that the spot price of gold drops to $1000/oz. I'm all-in at that price.
No shit
I believe Einhorn, then Bass, then Soros?
This is the " we better sell it, before they figure out it doesn't exist" moment..
Hang tight, this is just getting started.
Yes, expect massive dumping of ETF's as the money goes towards the phys right before the music stops and people grab a chair. I love how the ETF's are supposed to make it "convenient" for an investor to own physical metal ROFL!! Convenient how? A single ammo can will hold $30,000 worth of silver and over $1,000,000 worth of gold.
Take your "convenience", your cash settlements, your ETF's and shove them up your a$$ banksters!!
Evil Soros may actually have sold GLD to manipulate the gold price down, so he could buy physical cheap when everyone was selling. Don't underestimate their wiliness.
I said something similar on ZH back when it was first reported he was dumping GLD. What I think though was that he was shorting GLD and redeeming his shares for physical because he's a big enough player to do that. So he gets the physical at the same time GLD tanks and he makes a paper killing on short of paper GLD.
Soros ain't stupid...
Don't know him personally (as well as many bloggers seem to) to call him 'evil'. If they're referring to him using his brains to get richer, and as long as he isn't breaking laws or having them changed (like GS and JPM do), then the problem is... where? Is he not just looking out for himself? Unlike we here, who are totally selfless. Right? /sarc
Now watch some Neanderthal down-arrow me, just for posing a fair question.
Are you insinuating that everyone isn't like me and buys gold to watch the homeless waifs scurry after the coins I toss in the street?
Don't be ridiculous.
If you like Kyle Bass (I do), you must like Soros. Soros did to the Britponzi what KB is doing the the other ponzis (Jap, USD, Housing, Greece, etc).
Digital Gold is just ones and zeros floating around in a cloud. At the end it will go PooF.
i thought that was bit coins.....
everytime i figure out the answer, they change the question..
very deeply sorry to remind you that a bitcoin is worth 1.5 ounces of silver now
These ETFs are banker creations by the same entity's who brought you LIBOR fraud, so anything coming from them is suspect. Second, I am hearing people are selling these known fraudulent instruments and buying physical.
We'll know our disinformation program is complete when everything the American public believes is false.-- William Casey, CIA Director (from first staff meeting in 1981)
That's why the title would be more aptly called: "Exchange-traded-funds-dumping-paper-for-bullion".
Speaking of "JJ", I'd be leveraging some of JJ Luna's (How To Be Invisible) skills and methods to retain PM and privacy in these times.
Smashing down the sentiment at all costs is the primary goal the Fed is pursuing; it is necessary to curb physical demand at least among domestic people. The Fed knows very well that gold price cannot be hammered for a long time vis-a-vis the unequivocally positive fundamentals and strong foreign bank physical demand seen recently. It may just hinder the natural price increase as long as it takes. But anyway, the fact that paper gold price is so divergent from the fundamentals is stunning and probably hardly ever seen in recent history.
If, however, the Fed fails to desist from the practice a brand new gold market behavior will likely evolve; the whole available physical metal supply will be transferred to the East/South and every normal investor will soon realize the physical supply squeeze and unsustainable gap between paper and physical, which can eventually lead to a major switch in overall gold perception. Theoretically, the Fed may go and pretend even further; it may entirely cut off the spot price from everything else but this is too dangerous because PM miners would have to eventually stop slumbering, wake up and apply a significant premium to cover (at least) the production costs in the omnipresent inflationary environment. This could lead to a bizarre situation when spot price would be, say, $1600 and premium additional $1600. But should this happen, the gold market as we know it would be virtually toast.
There is less room for the Fed maneuvers than one would expect. It's a thin-ice dancing that may go out of control sooner than planned.
It's all a shell game. Don't get tricked and BTFD.
Sage advice, sage advice. We bloggers on ZH have been saying since last Nov. that some big fish is manipulating PM spot prices (downwards!), and that it's time to move paper-gold to bullion-gold.
The one thing that worries me, is their sociopathic disregard and callousness to free PM markets. Theirs seems a philosophy of "hammer ANY competitor or threat to the dollar's GRC status!". Am certain that they will manipulate the spot price to the extent that -- as you put it -- "the gold market as we know it would be virtually toast."
At that point -- gold or no gold -- we may be stuck behind the Economic Iron Curtain, run by the central politburo of the Fed and its shareholders. And have a New-World Order (Plan B), rather than a New World-Order (Plan A).
We need to keep an eye on both the supply and sales margin of bullion. These will be the 'canaries in the coal mine'.
that's a pimple on the gold supply's ass. secondly, much of their "holdings' were nebulous
Thats good for me. Am able to convert some savings into metal. Does that explain the drop in savings rate ? Meanwhile I am sure the Indians are loving these prices. After all the only good gift a father can give his daughter in wedding is some good gold jewelry. Everything else is trinkets.
It's articles like this that make me love zero hedge so so much.
Since no one else is gonna say it, I will. Silver, bitchez!
And when Gold holdings by an ETF are reduced, that means the Gold just evaporates?
“The sell-off is partly a reflection of broader negative sentiment towards [PAPER] gold.”
~~~
There ~ fixed it
Exchange Traded Funds 'Dumping Gold' – Does It Matter?
They are not DUMPING GOLD, they are dumping IOU's for Au.
They are not dumping; just moving it to where it is needed in the face of escalating demand. The physical cupboards are bare. BTW, the author should read the GLD and SLV prospecti; the average investor can not redeem physical and none of the bullion is allocated. Before he puts words to paper. he should do some research; MFG or PFG ring a bell?
Ah, the inverse of the Greater Fool theory: The Lesser Fool theory! Where each successive fool hopes to dump it to a less-informed (but more hopeful) fool. The last fool in the ETF line pays more than anyone else.
It is easier to assume that 0.082% of the holders of gld finally got around to reading the prospectus.
Exactly ~ You don't even need a boat to lose money in paper gold...
I wonder if the holders of gld have paper boats that sink as soon as they try to launch them so they can go out and accidentally lose their paper gold. That must be annoying.
I lost all my GLD in a boating accident
~~~
http://www.google.com/search?rlz=1T4TSNP_enUS476US476&q=paper+boat&um=1&ie=UTF-8&hl=en&tbm=isch&source=og&sa=N&tab=wi&ei=Jqs4Uc7aBKf-0gHB-4GwCA&biw=1920&bih=964&sei=K6s4UdvhG-PR0wGYloHACA#imgrc=2Qwo9djANDEcCM%3A%3BSMoB28Ehio0DvM%3Bhttp%253A%252F%252Fus.123rf.com%252F400wm%252F400%252F400%252Fkanate%252Fkanate1107%252Fkanate110700174%252F9971756-origami-paper-boat-recycled-paper-craft-stick-on-white-background.jpg%3Bhttp%253A%252F%252Fwww.123rf.com%252Fphoto_9971756_origami-paper-boat-recycled-paper-craft-stick-on-white-background.html%3B1200%3B1200
my favorite
http://www.youtube.com/watch?v=vLVKyKy4Sx0
Did you see that ammo box of gold go flying out of the boat. Wow! Wonder if they were able to find it?
The price of physical gold in sterling has hardly moved
I know.
Just used some spare pounds.With the pound down 7% recently why no price change ?
With your moniker name, I think you can figure it out. :-)
Why can't you Brits, like everyone else in the world, finally decide on ONE name for your damned currency already?
PS: The British pound, in its current incarnation, is about as "sterling" as my bowel movements.
.
Gives a new meaning to the term "dropped a few quid".
I do hope, that sometime before I die and start pushing up daisies, that market commentators will STOP referring to mythical "investors". Hot money playing casino games concentrated in 0.0001% of the population is not "investors", and to pretend that their daily actions (culling of sheep) represent sentiment of the masses makes me gag.
The gold price is a reflection of sentiment? I suppose if you only count those that matter. No, not. Fail for trying too hard to be part of the system of pretense. Also added to my personal ignore-this-idiot list. I need an app for that.
You're right. There's no volume. So who's buying? I think it's mostly institutional buyers driving the markets higher right now. It's a classic setup.
could just be part of a broader shift of paper ownership to physical ownership. Paper is above market so price will see it more than physical bidding which is more opaque.could be what's going on.
You are telling half the story. There is also a phys side as we all know. Without knowing the phys delivery numbers from the gold ETF, we do not know how much physical is trully being sold in the market or removed by non western entities.
The gold ETF may be an easy way to invest, but it is holding paper. For large hedgies it may be OK, but for the average investor, it is a coffin waiting to be filled.