So Little Gold: Why So Cheap? (GLD, SGOL)
Gold, the precious metal most often thought of as money, is in short supply. In fact, the existing above ground horde is so small one has to question whether it is realistic to think of it as having a serious role as money in the future. The fact is there just isn’t enough of it and – once institutional and private investors realize that the supply is so disarmingly and alarmingly insignificant – prices are likely to go parabolic.
Which Countries Own Gold?
The top 8 countries owning gold are the United States, with 8,133.5 tons, followed in descending order by Germany, Italy, France, China, Switzerland, Japan and the Netherlands. None of these countries formally back their currency with this precious metal so why do they possess such substantial quantities? One can only speculate but it is probably because of their continuing belief that gold is the only ‘real money’ compared to the coloured paper and numeric symbols on computer screens that are the ultimate in ‘make believe’ fiat currency.
How Much Does the IMF Own?
The International Monetary Fund (IMF) owns the third highest quantity of gold with close to 3,000 tons. After selling some 200 tons from its inventory earlier this year, and is making an increasing fuss over its desire to lead in forming a new international ‘reserve currency’ based on its (SDR’s) Special Drawing Rights.
What Quantity do the Various Gold ETFs Supposedly Own?
The most significant non-governmental holders of gold are the relatively new Exchange Traded Funds (ETFs). These bullion ETFs are sold through stock exchanges and can be bought (and sold) by retail investors through their stock broker like most common stocks. In aggregate, these gold bullion ETF’s ostensibly own more than 1,856 tons of gold, enough to rank them as the sixth largest holders of gold bullion.
To What Extent Are the Various Gold ETFs’ Holdings Backed By Physical Gold?
Unfortunately, the rapid growth of the bullion ETFs raise serious questions concerning exactly how much of their holdings are backed by metal in a vault and how much is just another version of ‘paper gold’.
ETFs Lack Operational Transparency
Complexity and opacity of their organizational structures and operating procedures leave many questions unanswered. Their prospectuses merely add to the fog. Most ETFs are layered organizations acting as trusts and repositories coupled with unclear practices concerning audits, segregation and allocation of the metals, unknown location of vaults and where the metals are sourced, and no clarity as to what extent the metals are leased or owned outright.
What is the Value of Gold’s Above Ground Inventory?
The total value of all the gold that exists in the world is roughly US $5 trillion at today’s price and, in terms of physical size, represents a cube measuring 66.5 feet. That’s not that much from either perspective.
What is the Value of the World’s Annual Gold Production?
The world’s annual gold production totals US $73 billion (silver is only US $10.3 billion) at today’s price. Compare that number to the projected United States budgetary deficit for fiscal year 2010 of US $1.6 trillion, the official U.S. accumulated debt of US $13 trillion and unfunded contingent future liabilities and obligations of well over US $100 trillion. One realizes just how infinitesimal annual gold production is. In addition, in spite of a 400% rise in the price of gold over the past ten years, annual production has not been growing. This has prompted some analysts to conclude that ‘peak gold’ is now a reality, much like the scarcity of new oil supply.
Phantom Gold?
The LME (London Metals Exchange) based in the UK and COMEX (Commodities Exchange) based in New York are the two principal markets for trading gold bullion futures contracts. Frequently the huge volume of trades which take place in these marketplaces are cited as evidence that there is plenty of metal available to easily satisfy all central bank, industrial and investor demand. But is that really the case? How large is the bullion market compared to production? Annual global gold production amounts to about 2,200 metric tonnes which is about the volume traded daily on the (LME) London Metals Exchange.
Associated bullion bank depository warehouse vaults are seemingly as opaque in their reports as are bullion ETF’s. Use of a variety of vague terms to describe the status of holdings such as ‘Registered’ and ‘Eligible’ are part of the problem. Central banks are similarly guilty of obfuscation by using terms such as ‘Bullion Reserve’, ‘Custodial Bullion Reserve’ and ‘Deep Storage’ gold. Nor is there any clarity in terms of how much is leased and from where?
Paper Gold
The central point to be derived from an examination of futures trading in gold is that it is principally a paper trading exercise. It is the ultimate in ‘paper gold’ in that less than one percent of all trades are settled by taking delivery of the metal. Since most traders are more than prepared to be paid out in cash, the metals exchanges have good reason not to hold an inventory of the metal since it isn’t needed for the settlement of trades.
Token Gold
Unfortunately, most people not directly involved in the business assume that the vast quantities of paper traded on the COMEX and LME is a proxy for the real deal…gold bullion. Trades are not, and apparently never have been, backed by the physical metal except in relative token fashion. Some analysts may consider this reality an attempt at deception. This writer takes no position on the issue, except to state unequivocally, that the metals exchanges and their associated bullion banks and industry trade groups such as the LMBA (London Bullion Market Association) do not possess any meaningful inventory of gold bullion.
Where’s the Gold!?
Where’s the Gold? Clearly, there isn’t much of it. This is the central question for all of us who consider ourselves investors in precious metals, whether it be the bullion or mining company shares. All of us need to ponder this question if for no other reason than to reflect on the prospects for future capital appreciation.
Parabolic Gold
This writer contends that, given the relative scarcity of gold and silver bullion supply, prices will go parabolic once governments and institutional and private investors realize supply is disarmingly insignificant.
Also refer to my previous article on the future parabolic rise in the price of gold as posted on munKNEE.com: HERE
Written By Arnold Bock From MunKnee
The most popular way to play gold is through ETFs and the biggest gold ETF is the SPDR Gold ETF (NYSE:GLD). We have put together some more details on the SPDR Gold ETF (NYSE:GLD) below for you to take a look at.
SPDR Gold Shares ETF (NYSE:GLD)
SPDR Gold Shares offer investors an innovative, relatively cost efficient and secure way to access the gold market. SPDR Gold Shares are intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that interest through the trading of a security on a regulated stock exchange. The introduction of SPDR Gold Shares was intended to lower many of the barriers, such as access, custody, and transaction costs, that have prevented some investors from investing in gold.
SPDR Gold Shares represent fractional, undivided beneficial ownership interests in the Trust, the sole assets of which are gold bullion, and, from time to time, cash. SPDR Gold Shares are intended to lower a large number of the barriers preventing investors from using gold as an asset allocation and trading tool. These barriers have included the logistics of buying, storing and insuring gold. In addition, certain pension funds and mutual funds do not or cannot hold physical commodities, such as gold, or the derivatives.
Key Info
| Name | SPDR Gold Trust |
|---|---|
| Objective | Designed to track the price of gold (net of Trust expenses) |
| Symbol | GLD |
| Exchange | New York Stock Exchange Arca |
| Initial Pricing | Based on the price of 1/10th of an ounce of gold |
| Estimated Expense | 0.40%* |
| Minimum Order Size | 1 share |
| Sponsor | World Gold Trust Services LLC |
| Trustee | BNY Mellon Asset Servicing |
| Custodian | HSBC Bank (USA) |
| Marketing Agent | State Street Global Markets, LLC, an affiliate of State Street Global Advisors |
| Short Sale Eligible | Yes |
| Margin Eligible | Yes |
| Structure | Continuously offered, open-ended investment trust |
* The Sponsor and the Marketing Agent have agreed to reduce the fees payable to them from the assets of the Trust to the extent required so that the estimated ordinary expenses of the trust do not exceed an amount equal to 0.40% per annum of the daily net asset value during the period ending seven years from the date of the Trust Indenture or upon the earlier termination of the Marketing Agent Agreement. Investors should be aware that if the value of the Trust assets is less than approximately $388 million, the ordinary expenses of the Trust will be accrued at a rate greater than 0.40% per year of the daily ANAV of the Trust even after the Sponsor and the marketing Agent have completely reduced their combined fees of 0.30% per year of the daily ANAV of the Trust. This amount is based on the estimated ordinary expenses of the Trust.
SPDR Gold Trust Advantages
| Easily Accessible | Listed on the NYSE Arca. |
|---|---|
| Secure | The Gold Shares represent fractional, undivided interests in the Trust, the sole assets of which are physical gold bullion and, from time to time, cash. |
| Relatively Cost Effective | For many investors, transaction costs related to the Gold Shares are expected to be lower than the costs associated with the purchase, storage, and insurance of gold bullion in a traditional gold bullion account. |
| Liquid | Structure allows for baskets to be created and redeemed according to market demand, creating liquidity. |
| Transparent | There exists a 24-hour global over-the counter market for gold bullion, which provides readily available market data. The price, holdings, and net asset value of Gold Shares, as well as market data for the overall gold bullion market, can be tracked daily at spdrgoldshares.com. |
| Flexible | Gold Shares (NYSE Arca: GLD) are listed on the New York Stock Exchange Arca and trade the same way ordinary stocks do. It is possible to buy or sell Gold Shares continuously throughout the trading day on the exchange at prices established by the market. Additionally, it is possible to place market, limit and stop-loss orders of Gold Shares. |
Investors have turned to gold ETFs as a safe haven during the recent stock market turmoil. They offer a great way to protect you against risk in your portfolio during uncertain times. We have put together some other ETF gold options for your viewing below:
LONG:
The investment SPDR Gold ETF (NYSE:GLD) seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.
The investment ETF (NYSE:GDX) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts (ADRs) of companies involved in the gold mining industry. The fund is nondiversified.
The Funds ETF (NYSE:GDXJ) investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Junior Gold Miners Index (the “Junior Gold Miners Index”). For a further description of the Junior Gold Miners Index, see “Junior Gold Miners Index.”
The objective of ETF (NYSE:SGOL) the newly listed shares is to reflect the performance of the price of Gold bullion, less the Trust’s operating expenses. The Trust is open ended and is designed for investors who want a cost-effective(1) and convenient(2) way to invest in Gold as well as diversify their Gold holdings.
The investment ETF (NYSE:UGL) will seek to replicate, net of expenses, twice the performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective.
The investment ETF (NYSE:DGL) seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return. The index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold.
The investment ETF (NYSE:DGP) seeks to replicate, net of expenses, twice the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.
The objective ETF (NYSE:IAU) of the trust is for the value of its shares to reflect, at any given time, the price of gold owned by the trust at that time, less the trust’s expenses and liabilities. The trust is not actively managed. It receives gold deposited with it in exchange for the creation of baskets of iShares, sells gold as necessary to cover the trust’s liabilities, and delivers gold in exchange for baskets of iShares surrendered to it for redemption. The trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act.
SHORT:
The investment ETF (NYSE: DZZ) seeks to replicate, net of expenses, twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.
The investment ETF (NYSE: GLL) will seek to replicate, net of expenses, twice the inverse daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics inverse to the index. It may employ leveraged investment techniques in seeking its investment objective.
Related posts:
- Commodity Trading Trends: Gold Is Cheap, Is It A Buy At These Levels? (IAU, GLD, DZZ, ABX, KGC)
- Cost Competition: Inflows Surge For Cheap ETFs (BND, AGG, VWO, EEM, GLD, IAU)
- Gold Investing: Why Bigger Isn’t Always Better Among Gold ETFs (GLD, IAU, SGOL, DGL, GDX)
- Gold Trading: Physically-Backed Gold ETFs Provide Convenience For Investors (GLD, IAU, SGOL, PHYS)
That was a lot of information. Thanks!