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GLD Has Changed The Gold Market

By Allen Sykora of Kitco News
Friday November 14, 2014 10:00 AM

Editor's Note: The world’s largest gold exchange-traded fund, SPDR Gold Shares, turns 10 years old on Tuesday. This is the first of a three-part series by Kitco News on the impact of GLD and other ETFs on the gold market.

(Kitco News) - Next week is the 10-year anniversary of an event that reshaped the way many investors approach the gold market.

SPDR Gold Shares (GLD), the largest gold-backed exchange-traded fund in the world, began trading on Nov. 18, 2004.

Analysts say this and other similar ETFs brought a certain number of investors to the gold market who might not have participated otherwise. At the least, it gave them more direct and quick exposure to the price movement of gold itself.

The people who oversee GLD estimate that somewhere between 750,000 to 1 million individual investors hold positions in GLD, and they say its shares are among the most heavily traded on the U.S. equity market.

William Rhind, chief executive officer for World Gold Trust Services

Shares of GLD trade like a stock on NYSE Arca, but are backed by metal put into vaults in London, according to the sponsors of the ETF. Shares track the price of gold itself minus a small management fee, with the trust’s website listing an expense ratio of 0.4%. The custodian is HSBC Bank USA.

“You buy it just like you would a share of IBM or any other company you would be familiar with,” said William Rhind, chief executive officer for World Gold Trust Services, which is the sponsor of GLD. He added that each GLD share represents roughly one-tenth of an ounce of gold.

GLD gives individual investors exposure to the price of gold itself. If they wanted to physically hold the metal in their homes, offices or safety-deposit boxes, they would need to turn to other products such as bars and coins.

Click the image to see the World Gold Council's full infograph

GLD was not the world’s first gold ETF. The first began trading on the Australian stock market in March 2003. However, interest in the investment product took off in earnest when GLD began trading in New York late in 2004.

“We have good reason to believe there is somewhere in the region of 750,000 to 1 million shareholders of GLD – individual people or accounts,” Rhind said. “It’s a huge fund, and there’s a very broad population of investors who own shares in it. There is a huge spectrum of people from individual investors to the largest, most sophisticated pension funds and hedge funds in the land.”

A number of big investment names have held GLD over the years, and as of the end of the second quarter, famed hedge fund manager John Paulson still held 10.2 million shares, according to news reports citing filings with the U.S. Securities and Exchange Commission. Third-quarter filings are due shortly.

As of mid-week, the ETF held 722.67 metric tons of gold, according to data on its website. If GLD were a central bank, its holdings would be 10th on a list of all central banks and the International Monetary Fund, as compiled by the World Gold Council. At one time, GLD was sixth on the list. GLD’s holdings are also equivalent to nearly a quarter of the world’s 2013 mine output that the Gold Council estimated was at 3,018.6 tons.

“ETFs, as an asset class, have been very important is broadening the investor base quite significantly,” said Philip Newman, director of the consultancy Metals Focus. He and others cited an increase in institutional demand as well as more buying by small retail-type investors.

Prior to the ETF, some of the main ways to invest in gold included buying a physical product such as coins, which include a premium above the price of the metal, or shares of gold-mining stocks. The latter gives investors increased leverage to movements in the gold market, but there is a risk of picking the stock of a company whose shares might sputter due to some kind of supply disruption when otherwise the gold market itself is rising.

ETFs essentially offer “complete exposure directly to the price of gold” as opposed to “indirect” exposure through mining shares, said Bernard Dahdah, precious-metals analyst with Natixis. Of course, some said, this might have taken away some investment from mining stocks.

Market participants also have the option of buying futures contracts. But because market participants put up a margin, or down payment, that amounts to only a small portion of the value of a contract, there is the risk of capital being wiped out quickly if prices decline by even a few percentage points.

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The rules for many managed-money funds prevent them from holding physical commodities or participating in futures markets, observers said. But they can hold a share such as GLD that simply mimics the price action of the commodity.

Jeffrey Christian, managing director of the consultancy CPM Group, said gold prices are no doubt still higher than they would be without ETFs since much metal is still held in storage to back the products.

The ETFs increased investment demand in gold, he said. However, he added, there may be a tendency among those in the market to overemphasize how much.

SPDR’s holdings as of the end of October were around 23.8 million ounces, according to the trust’s website. Total ETF holdings in the world were around 56 million ounces, Christian said.

But to put that into perspective, he said this is only around 4% of the total private inventory in the world, which his firm estimates to be 1.289 billion ounces.

However, the impact of the ETFs is more pronounced when looking at the increases that occurred during gold’s bull run, Christian said. Prior to withdrawals the last couple of years, ETF holdings were rising on average around 8 million to 10 million ounces a year. Investors overall were thought to be buying around 30 million to 41 million ounces a year.

“So what you can see is while holdings of ETFs are relatively small, ETFs in terms of annual demand when people were net buying was probably closer to 15% to 20%,” Christian said. “So they measurably added to investment demand on the way up. And they’ve added to selling on the way down. So they are more important in terms of their annual flows than they are in terms of inventories.”

Newman said, however, it’s hard quantifying precisely how much ETFs such as GLD impacted the gold price. For one thing, he said, professional investors and some institutional money likely would have come into the gold market anyway. “They have their means to do so,” Newman said. Still, the ETFs were “convenient” and especially might have been a boon for smaller investors wanting a way to enter the market in a “cost-efficient way,” he continued.

ETF Holdings Provide Daily Snapshot Of Investment Activity

There is one aspect of gold ETFs that is perhaps a positive and negative at the same time – the daily reporting of holdings and the market’s interpretation, Christian said.

Before ETFs, “the gold market has never had a daily indicator of investor demand for physical gold,” he said. That changed since major ETFs, including GLD, post their statistics on their websites on a regular basis.

“That’s a good thing and bad thing,” Christian said. “It’s a good thing because you have a daily measure. But it’s a bad thing because a lot of people…have relied on daily changes of the ETFs as an indicator of investment demand. And the reality is the ETFs represent about 15% to 20% of net investment demand. They represent a subset of investors who don’t necessarily think the same way as the other 80% or 85% of gold investors.”

As an example, Christian pointed to 2013. ETF investors sold a net 28 million ounces of gold. However, Christian said, gold investors overall were probably net buyers by some 33.3 million ounces – meaning some 61 million ounces of non-ETF buying. Further, CPM Group anticipates there might have been yet another 20 million may have been bought – taking total non-ETF investment demand last year to 80-85 million.

By Allen Sykora of Kitco News; asykora@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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