Originally published on May 21, 2019 by TraderStef at CrushTheStreet.
Despite a treasure trove of public information and a prospectus fact sheet, some folks still promote false narratives about the GLD SPDR Gold Shares Trust manipulating the price of gold. The BIS is a favorite target with references made to swaps and futures trading.
“The market does not know you exist. You can do nothing to influence it.
You can only control your behavior.” – Alexander Elder
Within the GLD prospectus, you will find the following:
“Objective: The investment objective of the Trust is for SPDR® Gold Shares (GLD®) to reflect the performance of the price of gold bullion, less the Trust’s expenses.
The Price of Gold: The spot price for gold bullion is determined by market forces in the 24-hour global over-the-counter (OTC) market for gold. The OTC market accounts for most global gold trading, and prices quoted reflect the information available to the market at any given time.”
I could end this article based on the above information alone, but we will go a little deeper for those who walk along gold’s pedestrian spheres.
The GLD is a derivative that trades only during business hours through the NYSE vs. gold’s 24-hour OTC spot price that is available on the foreign exchange market (FOREX) Sunday through Friday evening on platforms such as Netdania. Fluctuations in currency exchange rates influence the price of gold (see prospectus page 6) because gold and silver are money and commodities that can be used as currency. Unfortunately, financial markets are based on a disorderly floating currency regime ever since President Nixon ended the Bretton Woods agreement in 1971.
The GLD price does not determine the price of gold, nor do fluctuations in the physical gold held by GLD determine the OTC market price. The price originator for the GLD price-setting mechanism is the OTC spot gold market. GLD is also a lagging indicator. With real-time charts you can witness the OTC price precede price movements vs. the GLD, and near-term correlations and divergences occur between the price of gold and GLD’s bullion inventory due to factors such as sentiment.
Where does GLD source the spot price of gold?
LBMA Gold & Silver Price… “IBA operates electronic auctions for spot, unallocated loco London gold and silver, providing a market-based platform for buyers and sellers to trade.” – Intercontinental Exchange (ICE)
Participants and quote providers include market makers (aka dealers) that are international banks, the clearing/bullion banks associated with the London Bullion Market (LBMA), and execution and information brokers. Those agents operate in the main physical gold trading centers around the world. The end-client base of the dealers and brokers include a majority of central banks that hold gold in their vaults, private investors, mining companies, producers, refiners, and fabricators. The dealers also take positions in their own accounts.
Due to the nature of the OTC market, there is no last done price (the fix or benchmark) because quotes originate from a variety of sources. Despite multiple sources, only small discrepancies exist among quote providers due to competition for best bids and offers, and dealers and brokers minimize differences through arbitrage. The ICE benchmark price quotes out of London (LBMA) serve as a convergence from many sources of price discovery in OTC spot gold.
For an overview in non-technical language of how the GLD and SLV ETFs function, read this article. I simply replaced SLV with GLD in the following excerpt:
“This ETF is merely a passage…
When stock traders buy GLD shares faster than gold itself is being bought, the GLD price threatens to decouple to the upside. To prevent it from failing to mirror the price of the metal, GLD custodians have to shunt the excess demand into silver itself. So they issue enough new GLD shares to meet demand and keep the GLD price in line with gold’s, and then they plow all this new cash raised directly into physical gold bullion.”
In short, when GLD is overbought, physical bullion is purchased to back additional shares.
“Conversely, when stock traders dump GLD shares faster than gold is sold, the GLD price will soon break to the downside. This differential selling has to be funneled into gold itself. GLD custodians do this by buying back enough GLD shares to sop up their excess supply. They raise the funds necessary to do this by selling some of GLD gold bullion held in trust for its shareholders.”
In short, when GLD is oversold, physical bullion is sold back into the market to match fewer shares.
If you prefer a dive into the debate about the existence or source of physical bullion held by the GLD, that story is available in a 2016 article posted at BullionStar and in 2017 break down GLD pricing dynamcs at “What sets the Gold Price – Is it the Paper Market or Physical Market? ” You can review the most recent gold bar list and Inspectorate certificates at the GLD Website.
If you passed on the overview noted above on how precious metals ETFs function, here is an alternate explanation from Steven Saville, which clarifies why charts indicate a correlation between the price of gold and GLD’s bullion inventory.
“…Because traders of GLD shares tend to get more optimistic about gold’s prospects and buy more aggressively AFTER the gold price has risen, causing GLD’s market price to rise relative to its NAV and prompting arbitrage that results in the addition of bullion to its inventory. And because traders of GLD shares tend to become more pessimistic about gold’s prospects and sell more aggressively AFTER the gold price has fallen, causing GLD’s market price to fall relative to its NAV and prompting arbitrage that results in the removal of bullion from its inventory. The correlation is far from perfect, because GLD traders will not always become increasingly optimistic in reaction to a price rise or increasingly pessimistic in reaction to a price decline.
A final point worth making is that the annual change in GLD’s bullion inventory has always been very small relative to the total size of the gold market. Given the size of the total above-ground gold supply, there is very little chance that a few hundred tonnes per year moving into or out of GLD’s coffers could have a significant effect on the price.
So, the answer to the question of what do changes in GLD’s bullion inventory tell us about the future gold price – is nothing.”
When considering an investment in precious metals, be mindful that if you do not hold an asset in your hands, you do not own it. The GLD is a gold bullion trading vehicle where intraday liquidity is not a concern and it provides retail investors with a hassle-free venue with rapid trade executions.
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