Redemptions In The GLD Are Bullish For Gold

Tyler Durden's picture

Submitted by Eric Sprott & Etienne Bordeleau of Sprott Asset Management,

Recent outflows from physical gold exchange traded products (we use the SPDR Gold Shares, GLD) have been interpreted by the financial press as a sign of weakness in the demand for gold as an investment vehicle.

However, a closer look at the evidence suggests otherwise: the largest outflows in the history of the GLD (see Figure 1) started well before the large drop in the price of gold we observed on April 15th, 2013 (-9%, which represents a 1 in 11 years event). In fact, the net redemption of shares of GLD started as early as the second week of January 2013 (on a 3-month cumulative rolling basis). In this note, we will explore the theory that it was the shortage of physical gold and the ensuing arbitrage opportunity that drove market participants to redeem shares of GLD.

So why are the bullion banks that act as Authorized Participants for GLD, a group that includes JP Morgan and HSBC and others (who by-the-way were mostly bearish on gold leading to the April Crash), redeeming so many shares of GLD?

One explanation could be that they are trying to match supply and demand so that the net asset value (NAV) of the ETF is in line with its price. Historically, we have observed that large movements in and out of the GLD are associated with large discounts/premiums to NAV (Figure 2). This is due to the constant creation/redemption of the shares to minimize the discrepancies between the ETF share price and the NAV. However, the recent wave of redemptions has occurred even while the premium to NAV has been very stable, hovering around 0% for most of the year.

Source: and Sprott Calculations.
Last Observation: May 28, 2013 (Week 22).


Source: SPDR Gold Trust, Sprott Calculations.
Note: Large flows are defined as weeks where the average % change in tonnes lies in the top or bottom 10% of its distribution (i.e. tail events). 

We believe that the answer lies in the discrepancy between the paper and physical markets for gold. Over the past few months, there have been rumours of bullion bank customers unable to redeem their gold. While, at the same time, physical demand in Asia has been extremely strong this year. According to the World Gold Council (WGC), Indian imports should reach 230-400 tonnes in Q2 2013 (an increase of more than 200% year-over-year) and imports from China keep breaking records (the WGC now forecasts total Chinese imports of 880 tonnes for 2013).

This is reflected in the large premium customers in these markets pay over the “London Fix”, the price one should be able to get for physical gold. One way to measure the extent of the demand imbalance for physical gold in Asia is to look at what has been termed the “Shanghai Premium”, which is the difference between the quoted physical gold price on the Shanghai Gold Exchange and the London Fix gold price. Figure 3 above shows a weekly time series of the Shanghai premium in USD/oz. of gold. Since the beginning of the year, the Shanghai premium has been consistently above zero and historically large, reaching more than $50 per oz.

Source: Bloomberg. Last Observation: May 28, 2013 (Week 22).
Definition: Shanghai Gold Exchange Au9999 Gold (USD) minus London Gold Market Fixing Ltd - LBMA AM Fixing Price/USD.
“The Shanghai Premium is calculated on a weekly basis. Formula: (SHGF9999 Index * CNYUSD Curncy * 31.1g/oz) - GOLDLNAM Index”. 

Putting the pieces together

It is clear that demand for physical gold in Asia is strong and that the price of gold in these markets is well above the “Western” price. This creates arbitrage opportunities for market participants that have access to large and cheap quantities of physical gold in the West. The bullion banks happen to be the only ones able to redeem GLD shares for gold, and the GLD, with its 1,000 tonnes of inventory, acts like a large physical gold bank.

Source: Bloomberg, SPDR Gold Trust, Sprott Calculations. 
Note: Shanghai Premium shown as a 3-month Moving Average GLD flows are rolling cummulative flows over 3 months 

According to the GLD prospectus, the bullion banks can create or redeem units for as little as 10bps (0.10%). Even with transport and insurance costs (which are arguably lower for large transactions and large international banks), there is a clear arbitrage opportunity for the bullion banks when the Shanghai premium (or any other physical gold price premium in emerging markets) is as large as it has been recently.

Moreover, because of the intense demand for physical gold we have seen so far this year, it is very probable that the bullion banks themselves are in a shortage of physical gold, hence the need to use the GLD reserves.

Indeed, since 2005, there has been a strong negative correlation between GLD flows and the Shanghai Premium (-53%) (Figure 4 above). This means that large outflows (redemptions) from the GLD are typically associated with high premiums in the Shanghai gold market. This association has been particularly marked since the beginning of the year, with historically large outflows corresponding to an all-time high in the Shanghai premium.

To conclude, the evidence presented here suggests that, contrary to what has been stated in the financial press, the flows out of the SPDR Gold Trust may have been generated by the bullion banks to take advantage of an arbitrage opportunity in the physical market. This arbitrage opportunity occurred because of the intense demand for gold stemming from Asia and the inability of traditional suppliers to provide this gold (hence the large Shanghai premium). We believe that this activity further supports our hypothesis that there is a lack of availability of physical gold and an obvious dislocation between the physical and paper gold markets.

In these conditions, it is not hard to imagine that prior to April 15, the bullion dealers, with their large resources, were tempted to sell large amounts of gold futures in order to lower the spot price and make the arbitrage even more profitable by increasing the spread and sparking a tsunami of buying in Asia.

To us, this is clearly a bullish signal for gold.

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SheepDog-One's picture

Come onnnnn POMO!! We're all counting on you!

Dear Infinity's picture

Never a bad tuesday! also supports this theory, look at the charts, the premiums are consistently higher with every spike lower. 

LawsofPhysics's picture

No shit, what's the breaking point?  That is what matters.

EnslavethechildrenforBen's picture

I have 500 trillion shares of GLD that I will gladly sell to you for $100 each. Just let me plug in my Xerox...

Pareto's picture

Good one +1 In the sprit of ZH: "On a long enough timeline, the survival rate for all fiat drops to zero."

Thisson's picture

Not really.  The rate of gold production has a very minor impact on the price of gold, since gold is not consumed.  Mine shutdowns are more meaningful when discussing other commodities, such as Silver, which are actually consumed.

freet0pian's picture

Does this happen to be your etf you're spamming me with? Cause if it is you're liable to refund my coffee.



SRSrocco's picture

I posted this link in another thread, but this may be an appropriate place to put it.  It looks like the Chinese are taking advantage of the lower price of silver since the take-down on April 12th:

Shanghai Silver Stocks Decline Substantially after Price Take-down
Chaffinch's picture

+1 and thanks for that link Steve!

I find it interesting that even with the availability to the bullion banks, as Authorised Participants, of the gold held within GLD, the Shanghai Premium graph is still looking like a hockey stick in the making!

I suspect that in, addition to arbitrage, they are using the gold within GLD to keep topping up the gold in the Nymex warehouses, to keep the balance at 8,000,000 ounces. It will be interesting to see if they lower the bar to another obvious round number target, like 7,000,000 ounces, then 6,000,000 ounces, and so on, as the pressure builds.

Thisson's picture

This is econ 101: when price falls, more is purchased by customers.  But it is a nice confirmation that we're not in some momementum-driven bubble.

TheEdelman's picture

POMO v. GOLD on Turbo Tuesday

This is intense. 

mattdubz86's picture

looks like the NFP # was leaked super early ;)

GVB's picture

Eric Sprott is the man. When he says something, at least he comes up with solid figures rather than guessing. For example this "Nouriel Roubini" found it necessary on Monday to "predict" gold to go below $1000. Try to google this guy and you'll see the google auto fill option to automatically associate this man's name with "wrong". Says enough. 

machineh's picture

His figures seem solid enough (Figure 4) for the correlation between the Shanghai premium and GLD flows.

But where is the model showing the correlation between high physical premium and the subsequent PRICE?

Nothing presented here substantiates his claim that today's physical premia (and GLD outflows) are bullish for the gold price.




Ruffcut's picture

It has to do with benny's paper, taper caper, too.

Paper gold is not gold. Can't drive my paper car or live in my paper house.

Can't wait for more shitty paper food. More like cardboard.

MFLTucson's picture

Moreover, because of the intense demand for physical gold we have seen so far this year, it is very probable that the bullion banks themselves are in a shortage of physical gold, hence the need to use the GLD reserves.


This is otherwise known as theft and most likely what is happening in the fraud capital (Wall Street) of the world.

Canadian Dirtlump's picture

Any reasoning beyond some sort of fraud, theft or manipulation for anything that goes on in my view these days stretches the limit of rational thinking.


As a fully committed stacker though it has grown tiresome collecting positive information for gold and silver for years, all while averaging down as I buy more. You have positive news that could fill a warehouse, but until the casino crumbles we are where we are. I dearly hope we are near that point. Like driving by the bar and seeing a "free beer tomorrow" sign.


Given the fact that the criminals have sold much of their short positions to hapless hedge fund swamis, we may be closer than many think. Let's be real, this bitch can go to the moon only when the guys who run the show can either take the most advantage of it, or suffer the least for it. So anyways, I'll keep on stackin.

Kirk2NCC1701's picture

Did you know that you can now 'stack it' at the Mint?  The RCM, that is:

Some (Americans) will bitch & moan about "gold confiscation" or getting "Corzined".  What they (conveniently) overlook, is that all these things only happened in the US.  Just like they overlook the embarrassing truth that only the US has ever used nukes on people.  More than once.  How ironic.

I submit to you, that gold is and will remain safer to store (publicly or privately) in Canada than ANYWHERE in the US.  Its record speaks for itself:  Zero confiscations, zero foreign wars to fund a broke government.  And a darn sight closer than Hong Kong or Singapore.

"On a long enough timeline... the US Gov or an 'Ex' (and their lawyers) will come after your ass(ests) and gold."

I hedge accordingly, and therefore refuse to hold significant PM within US borders.

ronaldawg's picture

Yayyyyy! Stack your PMs at a foreign mint - especially one with a semi-socialist government with "free" healthcare.   What could EVA could go wrong?


P.S.  As a disclaimer, I love Canada and all of its gold and silver products.

MeelionDollerBogus's picture

the entire long gold bullion position is valid from knowing the years following will see 3k to 10k per 1 oz bar or equivalent purchasing power in a post-dollar world.

Any crying on the way there about manipulation keeping the price down tells me people are day-traders looking to get fiatbux a.s.a.p. and are weak-hands who couldn't care less about holding bars or coins.

Ignatius's picture

"Redemptions In The GLD Are Bullish For Gold"

File under 'No Shit'

Canadian Dirtlump's picture

I wonder if they redeemed the gold bar pisani showed off during his Scooby Doo Mysetery Incorporated grade investigation of the GLD vaults which wasn't on their bar list and belonged to someone else LMAO!

kito's picture

im not saying gold wont go higher if the dollar collapses (although im not in that camp), but mr sprott, who is getting totally spanked by gold and silver prices, is not to be taken for more than book talking..............

oddjob's picture

I guess if you just started paying attention to Eric Sprott 2 years ago you might think that.

francis_sawyer's picture

Kito ~ EVERYONE talks their book... [you & I included]... Remove the 'book talking' constant from the equation & it's the same equation [with no fans or TV cameras in the stadium]...

kito's picture

i dont have a book, except for Cheesepope Sports Legends, which is only 1 page long........  ;)

disabledvet's picture

These are PAPER prices he's talking about. Will that move the some point, sure. But as capital flows go this is puny too. Try to fund a single oil gas rig in North Dakota...FOR A DAY. That's REAL money. "for what purpose" I agree is a good question. Listen...surging equity prices put bottoms in ALL asset classes...including gold. "there's always a bid" as they say. Obviously the 90's stands out as a time when equities generated massive returns across the board and ALL commodities crumbled (including gold and silver.) but we had some real economic growth then...certainly less unemployment, a LOT more inflation pressures. We also did NOT have an experience of getting stabbed in the back by an entirety of politco's for going into Iraq. "there is surprisingly little war in our war effort S a consequence."

fiddler_on_the_roof's picture

Very Correct, just talking his book.


At the same time when GLD is losing Gold, SLV is gaining Silver ?

Why don't Sprott talk about that ? Because it is bearish for Silver and he knows that and the reason he sold for his charities.

Quinvarius's picture

Eventually we will find out how much gold is really in the GLD the same way we found out how much silver was in SLV.  The reported inventory will just flatline.  Unable to redeem without making a purchase and unable to maintain any added inventory.  It will look like a flatline with every single ounce they get added dumped out the back door the next day.

OutLookingIn's picture

Follow the insiders.

Like George Soros.

At the start of the year he redeemed over $40+ million, in bullion from GLD and now he is very heavy into precious metals miners, both seniors and juniors. His gold and silver investment portfolio is rumoured to be north of $250 million.

He sees a very good thing, yet he will 'bad mouth' gold in the MSM so as to extend the gold bear, so he can gather more for himself! Greedy bastard!

Arius's picture

nothing personal - thats how the game is played.

otherwise, how can he continue to lure the greedy fund managers to Short the mining stocks ... i can guess who is providing liquidity and taking the other side of the trade to muppets ... double down you muppets - losers!

greatbeard's picture

The last time Sprott was pumping silver he was selling his own big time and it soon after took a big dump.  I don't get real warm and fuzzy anymore when I see Sprott Promotions Inc anymore.

Canadian Dirtlump's picture

the last time sprott sold shares in his REAL 100% backed ETF it was to pay bills for his charitable trust, and to buy mining shares.

MxBonanza's picture

Perfect timing, just before the mega smackdown of April.

ParkAveFlasher's picture

Sprott seems to be a market-maker.  I don't trade, maybe a trader can confirm that.

greatbeard's picture

>> it was to pay bills for his charitable trust,

What bills were due that would demand him dumping that number of shares all the sudden?  I have no problem with Sprott selling, but his pumping at the same time is what changed my attitude towards him.  I'm no less a fan of the metals but the list of people I trust gets reduced every day.  Due to his actions, Spott joined that list of people to ignore when their lips are moving.

MxBonanza's picture

Redemptions of GLD are bullish for the COMEX ponzi. It provides physical, so the fractional paper gold scheme and the price suppresion continues for a loooong time.

I do not trust Sprott any more than the other banksters.

I believe that this manupulation will continue much longer, in the meantime, I keep stacking.

Winston Churchill's picture

"Im just hopimg for another three months more of manipulation before

the G20 meet in September.

Zero Govt's picture

"In this note, we will explore the theory that it was the shortage of physical gold and the ensuing arbitrage opportunity that drove market participants to redeem shares of GLD."

this is worse than "theory" from Eric Sprott's complete fantasy

I don't suppose the sales of GLD had anything to do with simple buying and selling patterns of stock markets through the centuries where you sell as price goes down (tanks)?

you'd think Sprott was an academic (born yesterday) with this rubbish 

fiddler_on_the_roof's picture

At the same time when GLD is losing Gold, SLV is gaining Silver ?

Why don't Sprott talk about that ? Because it is bearish for Silver and he knows that and the reason he sold for his charities.



digalert's picture

If you read Harvey Organs daily gold and silver report, you wou see that while GLD is losing bigtime. Silver in the SLV vaults have remained rather steady.

fiddler_on_the_roof's picture

yes, SLV is showing steady inventory unlike GLD for the year 2013.

There is a lot of silver. Only silver shortage if at all for small retial clients because of minting issues to smaller coins.

Looks at increase in Asian demand for Gold unlike Silver, when price dropped.

Silver demand actually slumped in India.


I don't need to read any Harvey's blog, I can read it directly from source.


GLD: click "Spreadsheet of archived data"

SLV : click under "Historical data"



GLD : inventory down by 24.99% for the year to date.


12/13/2012 : 1350.82 tons

6/3/2013    : 1013.15 tons


SLV: inventory down by .91% for the year to date.


12/31/2012  : 10084.96 tons

6/3/2013      : 9992.92  tons


francis_sawyer's picture

Ya'd think... In any case, I'd place 'reportings' of GLD & SLV inventory on par with BLS...

seek's picture

Must not... allow... AU... over $1400.

The market open takedowns are getting super predictable. Too bad I'm a saver and not an trader, or I'd take advantage.


socalbeach's picture

Victor the Cleaner's algorithm for trading gold goes long whenever there is a large GLD redemption, and closes out the position when there is a large creation.  Read about it here:


GLD – The Central Bank Of The Bullion Banks

If I understand what he's saying, there's the correct amt of physical gold in the GLD ETF for every share, but there is more than one owner of each GLD share.  Furthermore, the gold in the trust can just be gold in transit between a seller and a buyer.  In other words, GLD is fractional reserve gold ownership just like your bank deposits are fractional reserve dollar ownership.