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SPDR GLD ETF Unloads 79 Tons of Gold - Should Investors Follow Suit?

by: J. Amberger September 11, 2008 | about stocks: DBP / DGZ / GLD / IAU    

J. Christoph Amberger

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And so it begins. The SPDR Gold Trust (GLD), the world's largest gold-backed exchange traded fund, reported that it sold more than 10 tons of bullion this past Tuesday. That corresponds to 1.7 percent of its total holdings.

SPDR now holds "only" 631.2 tons of gold, down from 641.93 tons on Sept. 8. The trust has sold 68.7 tons of gold since its holdings hit a record 705.9 tons two months ago. The current level is still up from the 627 tons reported for December 2007 -- when gold was trading in the $860 range... a solid $100 above today's median price.

The sale of gold through the SPDR Gold Trust should not be underestimated. Even at its lower Dec. 2007 levels, the fund held more physical gold than China, the Netherlands, and the European Central Bank. It has more gold than Russia, the Bank of England, and Saudi Arabia. In fact, the difference between the gold reserves of the Bank of Japan and GLD in December was a measly 130 tons.

Let's do the math: GLD purchased 79 tons of gold between Dec. 2007 and July 2008. That corresponds to the total gold reserves of Australia or Kuwait. That demand is now gone from the market.

In the last two months, the fund has liquidated 74.7 tons of gold... the equivalent of Egypt's total reserves.

And just Tuesday, it pumped 10 tons into the market. According to the Reserve Asset Statistics of the World Gold Council, that corresponds to the combined reserves of Canada, Mexico and Bahrain.

And GLD is just one gold-backed ETF.

In the past, I have liked to point to the introduction of exchange-traded funds linked to gold as a major new catalyst for new gold demand. In fact, it was mainly demand from fund investors -- not even coin-hoarding gold bugs or jewelry buyers -- that was driving the gold price up. The fund first listed on the NYSE in 2004... are you seeing a pattern emerge?

Its original price was based on the price of 1/10th of an ounce of gold. The current spot price of $756.10 would thus correspond to a share price of $75.61.The fund closed at $74.22 on Wednesday, and after-hour trading indicates further downward pressure at a share price of $73.84.

What is the downside? Let's look at the inventory: GLD only has 4 more tons of gold than it had at the beginning of the year. Gold is now trading $50 below its early January price level of between $850-930 per ounce. Which means the YTD excess inventory is held at a loss...

With a major gold purchaser having turned into a major seller of physical gold, there is now a severe disturbance in the supply-demand ratio that supported the bull run of the past four years. On Aug. 5, when I posted my article "Gold Price Plunges: Might as Well Hold Stocks" on SeekingAlpha.com, I wrote:

"Oil's downside by now has been pegged at $110 and even $70 per barrel, that's 26% or even 50% below its record high. For gold, a synchronous decline would result in prices around $750 or even $500 per ounce. It seems unlikely. But, since my gold bug friends brought up the Carter Administration... history not only documents straight increases -- but horrendous drops far larger than that, all within the last three decades."

A Commenter responded:

"As for gold at $750 and $500, those aren't support points on any chart I've seen. The Gold support points I have are $850 (very strong), $800 (weak) and $650 (Herculean strong)."

As we're closing in on $100 oil and $750 oil, those Herculean strong points are not quite looking quite as untouchable any more. After all, Hercules, too, fell prey to the painful revenge of the centaur Nessus.

And GLD still has all the gold in China to liquidate...

Disclosure: None

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This article has 50 comments:

  •  
    Sep 11 09:10 AM
    People are grabbing the gold from the ETF nbecause it is the last source of physical gold available. Vaults of Central Banks are empty, warehouses of COMEX are empty.
    Reply
  •  
    Sep 11 09:19 AM
    It seems to me that if they are dumping that much gold, prices should have completely collapsed. 10 tons only caused a $10-15 drop on Tuesday. Prices are holding nicely IMHO. SOMEONE is buying all that physical gold, and its not mom & pop.
    Reply
  •  
    Sep 11 09:42 AM
    demand is now gone from the market?
    so who owns all GLD gold now?
    this trick of destroying hedge funds
    long/short positions in commodities/financials
    is working for commodities at least.

    Enough to jump out of the greenback soon
    smart gentlemen, you dont want to be on
    board when the next captain jump on the ship...
    Reply
  •  
    Sep 11 09:57 AM
    Yes, absolutely, you should dump any gold you have and get short if you've none.

    You need to flee to the safety and security of paper money backed by the full faith and credit of Joseph L. Sixpack and the $550,000 option ARM he took out on his charming 3-bedroom house on 1/16 acre. That kind of strength and security, coupled with a dynamite 1.7% yield, will get you through these troubled times with a tidy profit. When all's said and done, gold will be only a memory, a worthless coin framed and mounted on the wall next to Enron and Petsmart certificates in the "gone to zero, ain't coming back" hall of shame.

    Get out now while you still can!
    Reply
  •  
    Sep 11 10:02 AM
    Finally a Gold bug accepts that the Gold scenario have change severely in the overall environment, it's not that Gold isn't worth its price, it is that major holders of Gold nowadays are Funds, Investments Bank and ETF, it they don't sell at times where the price of the dollar, the inflation outlook and the overall sentiment is recessive, then their profit is going to dissapear forever, dont' trade spot trade short funds like DB, noone ever would like to hold a losing asset unless it is properly hedge but how can you hedge holdings of physical Gold? probably by selling paper Gold which makes the case even stronger. Watch out for analysts recommending you to buy without looking at the big picture, they may be angry for the so called free market (a manipulated one) but the fact is that you want to make money regardless who is mad of the market and who is not, madness comes as a natural reaction to huge losses in a very challenging environmet like this. On top of this, losing investments bank now have to grab their well built up commodity wealth while it last, it is the one of the few liquid assets that can provide cash when they are going broke
    Reply
  •  
    Sep 11 10:05 AM
    I guess this puts to rest those conspiracy theories that GLD doesn't actually hold physical gold. Otherwise, how and why would they sell?

    I agree with the author's implication that the easy tradability of GLD, SLV, and other commodity ETF's has been the greatest contributor to the commodities bubble - even more so than dollar devaluation. Several authors have pointed out that dollar devaluation only accounts for a portion of the price spike.

    Long term precious metal investors are perhaps unused to having momentum traders piling into their markets with stunning amounts of capital as prices rise and then piling out as prices fall. Thanks to ETF's, commodities are now just another asset class for the day trader.

    So spare me the claims of manipulation.
    Reply
  •  
    Sep 11 10:19 AM
    I agree with Chris, a change in mindset is required, hopefully for individual traders like me the market is going to go back to those tranquil days when we where able to make USD 2.000 / day just by using a large stop. If you made good money over the last 3 years keep it safe and make up for those sleepless nights by have a wonderful vacation, in the mean time the trend is your friend and the upcoming low volatility your live insurance. Don't mess with the past, it is just that the past.
    Reply
  •  
    Sep 11 10:21 AM
    I keep asking myself "who's buying" all this "gold"?

    Also, if so much is changing hands, wouldn't it make sense that it would blip on a buyer's radar somewhere?

    I smell a rat.
    Reply
  •  
    Sep 11 10:27 AM
    This selloff is all happening on the margin and is therefore temporary. The holdings of all ETFs probably amount to less than $25 billion, which is very very low. Once the forced liquidation by deleveraging hedge funds is over, the dominant news will be about the continued distress in the financial sector and gold will rise again.
    Reply
  •  
    Sep 11 10:30 AM
    In August, the U.S. Mint suspended sales of American Eagles because they could not keep up with demand. A glance a chart of sales (www.sharelynx.com/) shows that although sales are rising, they are only at levels seen several times in the past when there was no suspension in sales, and the level is much less than the build-up to Y2K.
    The U.S. Treasury statement for gold has not changed by one ounce since March 2006. You can find that statement here:
    fms.treas.gov/gold/ind...
    Have you ever seen any going enterprise have the exact same working inventory for 28 months?
    What goes on here? This comes from the U.S. Treasury and U.S. Mint, not some conspiracy web site. Can someone explain this?
    I wonder if the recent dollar rally and gold decline was engineered in preparation for the recent Fannie and Freddie action.
    Reply
  •  
    Sep 11 11:08 AM
    No shortage of longs here , there could be a lot of suffering to come.

    My point to those who argue that gold is a 'Hard Asset' and therefore should be held in preference to paper assets , is that hard assets that have risen in a few years from 400 $ to 1000$ are just if not more risky as paper assets that are being slowly undermined by inflation / credit crunch etc.. the on;y answer is earn more and spend less .
    Reply
  •  
    Sep 11 11:14 AM
    The GLD ETF has no discretion as to its purchases and sales of physical gold. Whenever new investors in the fund bring in physical gold in return for Creation Units of the fund, their inventory grows, and when investors redeem shares for the physical commodity, inventories shrink, as they have recently. In fact, StreetTRACKS Gold Trust ETF ("GLD") doesn't really buy or sell gold; all they're allowed to do is exchange gold for Creation Units, or blocks of 100,000 shares of the ETF. (If this surprises you, it is only because you've never read a prospectus of an ETF--any ETF!)

    In recent weeks, a local shortage at some jewelers created a small discrepancy between the price of gold on the commodities exchanges and the price at physical gold distributors, e.g. coin dealers. James Conrad, here on Seeking Alpha, quickly came up with a major conspiracy theory claiming all non-physical gold is fake, and precious metal exchanges are one big scam.

    Arbitrageurs, however, knew better and jumped in to cash on this discrepancy. They bought shares of GLD, then redeemed 22 million of them for 2.2 million ounces, or 68.7 tons of physical gold, which they have already sold to jewelers, mints, and panicking people convinced of the impending demise of all financial systems. The profit, after redemption fees, was not big in money-manager terms, but it was risk free, which is what arbitrage trading is all about.

    Whenever mass hysteria hits the market, it is those with a rational head on their shoulders who make the most money.
    Reply
  •  
    Sep 11 12:05 PM
    You say, "In the last two months, the fund has liquidated 74.7 tons of gold... the equivalent of Egypt's total reserves."

    I say, "In the last two months, the fund has liquidated 74.7 tons of gold... the equivalent of LESS THAN half of the SAME two month demand FOR gold from Indian consumers.

    Here is what Hindu Business Line says,

    "Mumbai, Sept. 9 The sharp fall in gold prices has led to a steep rise in imports which had been recording a drastic decline from April onwards.

    Gold imports in August rose 47 per cent to 100 tonnes against 68 tonnes logged in July."

    www.thehindubusinessli...
    Reply
  •  
    Sep 11 12:13 PM
    It's a mystery to me why ETF's that deal in a commodity like gold wouldn't have been organized to allow the fund to arbitrage and keep the profits aside as operating cash so that it wouldn't be necessary to dump the commodity at unfavorable prices or be unable to acquire it at favorable prices. Maybe instead of commodity ETF's we really want commodity arbitrage funds...
    Reply
  •  
    Sep 11 12:14 PM
    User 260081,
    This sounds like the critical reasoning section of a computer based test:

    I happen to know that Joe bought a bunch of commodity x last month. Therefore I expect him to buy the same amount each month from now on.

    Another variant is...

    There is a rig in the Gulf of Mexico that has struck oil and is now producing 10k barrels a day. Therefore worldwide prices will fall.

    Find the fallacies...

    Anyone who plans on not losing money needs to be able to tune out anecdotal stories and context-free details and look at the macro picture with deep skepticism.
    Reply
  •  
    Sep 11 12:31 PM
    Very interesting stuff. Looks like the commodities are in a very different pl;ace than they were two months ago. I'd sell now and wait for gold to hit 700$, then buy again. GLD will eventually go back up even its it's coming down from its oversold condition right now
    Reply
  •  
    Sep 11 12:33 PM
    India accounts for 18% of global gold demand. I think it is relevant to a discussion on supply and demand.

    Indian consumers have an average annual demand of about 800 tonnes.

    If it is rising or falling by ten percent it is relevant to the price of gold.
    Reply
  •  
    Sep 11 12:41 PM
    Bottom lines everyone is somehow right in their views, my message basically goes to thos who buy Gold based on what they read on always bullish technical/fundamental reports. If you still want to be a bull then sell now and buy back at the 50% retracement of the move down from 750 any where it goes (i.e. 660, 500 or else) when that retracement be reached then the upward trend can be relied upon. Meantime there is gonna so may twist and turns in price and speculative forecast from those who don't the real money. Owen made a point as to how ETFs work, but it doesn't change the bearish trend with not identifiable bottom yet!!
    Reply
  •  
    Sep 11 01:31 PM
    Yes....all bail and drive the PM price even lower. That's what I'm counting on as history has shown that any major corrections always shake out the faint of heart. When I was in high school gold was $35 an oz. If I didn't spend all my money on beer and women back I would have bought gold and silver. Look back five years, all you naysayers at what PMs were selling at and yes....listen to guys like Amberger and SELL....don't wait. The dollar will continue up, despite all logic and oil will keep going down, maybe $20 a barrel, peak oil, rubbish. SELL!!!
    Reply
  •  
    Sep 11 02:12 PM
    I mostly buy silver bullion. Silver's gotten hammered too of course. Last week as silver was falling, I called my pm dealer, one of the largest in the U.S., and he told me that delivery of 100 oz bars of Englehard or Mathey were almost impossible to find. I could get Pan American bars, as they are the sole distributor...8 to 10 weeks out because the demand was so high! So, a little reality check, the "paper price" of silver and gold was falling fast last week while American 1 oz gold and silver eagle bullion coins wer very difficult to find/buy as was 100 oz silver bullion buys. There's a disconnect here boys between the Wall Street geniuses and the real physical bullion buying crowd who recognize that only gold and silver are real money. Gold and silver can never go to zero, but how about Freddie, Fannie, Enron, WorldCom to name a few? The physical gold and silver markets are very small by comparison to equities and debt (bonds). In the next 3-5 years if you don't own precious metals, you probably won't be able to afford to but them. BTW, are any of you concerned about the value of the dollar and the TRILLION$ in U.S. debt...and continued Federal bailouts? Where does all this money come from any way?
    Reply
  •  
    Sep 11 02:30 PM
    Malkiel, GLD is a "market" where one can buy or sell small or large amounts of gold exposure. Most people do not want to buy a gold trading company which may or may not trade sucessfully. They want to be "indexed" to the cash gold price. There are public commodity trading pools available if you want someone to do that for you. Check Clusty.com or Google.com for commodity trading pools or funds.
    Reply
  •  
    Sep 11 03:54 PM
    Who is buying? China. MSN Reports today that:

    China: Dumping the dollar

    The increasing wealth in China and India, as well as in the Middle East, is supporting the gold price.

    The biggest single buyer of gold right now is likely China's central bank. China had amassed $1.8 trillion in official currency reserves by the end of June, much of it in U.S. Treasurys. Though the U.S. dollar has regained some strength lately, the International Monetary Fund, Warren Buffett and others still see the long-term trend as down. That's a big reason China watchers think the country is converting some of its cash into gold.

    Map: World's largest gold buyers and sellers

    China reported 600 metric tons of gold reserves at the end of June, or 1% of its total cash reserves. At today's prices, that's about $16 billion worth, or about 20 million ounces, less than half a percent of the estimated total gold in existence. Though Beijing is not reporting any addition of gold to its official reserves, some analysts at top trading and investment management firms believe China is quietly buying gold to diversify out of the dollar.

    What we do know for sure is that Chinese citizens are increasing their purchases of gold. In 2007, Chinese retail investment in gold rose 63% to 32 metric tons, according to the Shanghai Gold Exchange, as China supplanted the U.S. as the second-largest consumer of gold. Also in 2007, China ended South Africa's 102-year reign as the largest gold producer in the world, taking the top spot as its production rose 8%, according to GFMS, a metals consulting company in the United Kingdom.

    Reply
  •  
    Sep 11 04:39 PM
    At the current rate of decline, gold will reach a dollar in about 7 weeks.

    I'm putting in a stinker bid at two bucks, GTC. Please don't bid above me.
    Reply
  •  
    Sep 11 04:43 PM
    Let's see now. Major financial institutions are collapsing by the week in the U.S. South African gold production is falling by double digits on an annual basis. Major gold producers aren't replacing their reserves and can't grow their production.

    The result - the US Dollar is soaring and gold is collapsing.

    Yep, that makes sense alright.
    Reply
  •  
    Sep 11 04:46 PM
    Why the rush, Diamond Lou? Wait eight weeks and make gold sellers pay you to take the stuff off their hands!
    Reply
  •  
    Sep 11 06:26 PM
    Bearfund, That was a classic response. Thank You for your accurate assessment of the imbeciles at their best, selling gold and buying toilet paper for safety!
    Reply
  •  
    Sep 11 08:10 PM
    Don't get rude guys, everyone is right, just sell now and buy back in a weeks when physical demand from India and China come back and that would help stablished a real bottom but al least USD 60 lower than where it is now, remember that techically gold is one of the few assets, if not the only one which has not completed the 100% retracement from Sep last year, so there is a case for bears and bulls, just time the market correctly and both short-term bears and medium term bullish will be al happy
    Reply
  •  
    Sep 11 10:24 PM
    Maybe people arent fooled by paper gold anymore and see whats about to happen dumping the ETF forcing / freeing the gold up so they can rebuy real gold?
    Reply
  •  
    Sep 11 10:26 PM
    Run like the herd wile I hunt like a loin
    Reply
  •  
    Sep 11 10:50 PM
    Negative 0 and beyond.
    If you thought your losses stop when you to big to fail stock crashes down to 0 guess again with the bail-out inflation will drag you to hell.
    People thought Ben would be dropping 100’s instead he’s dropping Banks…..LOL
    Reply
  •  
    Sep 12 05:32 AM
    According to Gary Dorsch's latest commentary on the Kitco.com goldbug site, Russia appears to want to start another Cold War. Putin is said to have suggested he may need to point missiles at certain European cities to counterbalance the U.S.'s intrusion into "their" sphere of influence. The author suggests this has spurred on a flee from the Euro and Eurozone stocks to the perceived relative safety of the US dollar, despite the interest rate superiority of the Euro. Of course, several other bigger factors are at work here in this gold price correction/crash - oil, an oversold dollar/overbought gold, etc. but, if his analysis is accurate, it may be interesting to see what effect a possible cooling down of tensions between Russia and the West would have on the USD/Euro and thus the gold price as investors return to the Euro. Also, the 80 level on the dollar index should be watched closely as it was long-term support before and should now serve as strong resistance. Also, since Indians already bought so much gold in August, I wonder if their demand for the rest of this Autumn will be slack? Your comments please.
    Reply
  •  
    Sep 12 06:45 AM
    Jim Rogers said today that gold might correct to 500 USD scaring everybody off.

    jimrogers-investments....
    Reply
  •  
    Sep 12 09:55 AM
    500 USD, maybe if its in 2010. There are too many bulls now, and until many of them throw in the towel, they will buy on dips. Maybe by 2010, gold will be $500 and the dollar index will be at 100.
    Reply
  •  
    Sep 12 10:18 AM
    And maybe the housing crisis will end, the banking system will be fixed and the tooth fairy will leave a big dime under all the doller bulls pillows. Talk about a fantasy world. The Russian, Chinese and the Saudis have been buying massive amounts of gold and silver....one reason for the shortage and will soon introduce thier new currencies backed by PMs! It's what the US used to back the dollar on, before the Federal Reserve and fiat money backed by this air, which is where the USD$ is headed. All fiat money rallies just before its death....look at history. Any idiots investing in USD's will find themselves like the Germans did after WWII, using huge bundles to stoke the fires to stay warm. The US will habe no choice but to abandon the dollar and start fresh with a currency back by real money, for 1000 years....and guess what that will be.
    Reply
  •  
    Sep 12 11:48 AM
    Again, it is a matter of perspective. The Gold ETF did not "dump" gold. A buyer or buyers purchased 10 TONS of bullion!!!!

    That is not a bearish trend.... that is a bull trend!

    My post earlier noted that MSN reported that China is buying Gold...does anybody think that it might have anything to do with the fact that the US economy is tanking and we owe them a huge mountain of money and they are holding a worthless amount of our paper that we keep printing to keep bailing out our failing institutions???

    If I was China, I would take those greenbacks and buy every ton of bullion I could get my hands on. Because remember folks, the dollar is backed by the full faith and credit of the US Government! There is no more faith in it, and the only credit we have left is the stuff we keep printing....
    Reply
  •  
    Sep 12 12:24 PM
    Kelly, Are you a private investor? Or do you work for an interested firm?
    Reply
  •  
    Sep 12 01:20 PM
    Love you, bearfund!
    Reply
  •  
    Sep 12 01:21 PM
    Love you too, Kelly.
    Reply
  •  
    Sep 12 03:51 PM
    User 30121, You too!

    deuxsous, Just a concerned investor. I also invest in domains, and blog a lot about that industry. Right now, I am very relieved that I am involved in an industry that is appreciating faster than any commodity or stock on the planet.
    If anyone is interested in learning more about the domain market you can take a look at dnjournal dot com. Within any market cycle there are still ways of making money....

    Reply
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