Are Gold ETF’s Responsible For The Rising Price Of GOLD?

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September 19, 2009 10:19am ETF BASIC NEWS NYSE:GLD

gold-bullHere is an excellent piece written by a member of the GLG Energy & Industrials Councils:   In the days of yesteryear, investment in gold came primarily from wealthy individuals, from banking institutions, from the near


, middle and Far East of the world, with U.S. demand coming through coins and bullion from 1974 onwards.  These investors were the extremely rich and powerful at the top end of the market, with an additional large number of people prepared to hold coins at home or the bank, but because of the storing risk, insurance and transport costs, gold itself was not commonly bought across the investment spectrum.   Pension and other funds were just not permitted to hold gold bullion, so the only way they could invest in gold was through gold shares.   These were mining companies benefitting from the gold price but subject to the usual corporate risks.   They certainly had no direct impact on the gold price itself!   So the market could not attract the true demand for gold until the advent of the gold Exchange Traded Funds.

As you know it is the ‘marginal’ demand that swings a price.   Well, in the gold market in 2006 the balance between demand and supply was narrowing as it had been over the previous few years.   So additional demand for gold had an increasing driving force behind the price of gold.   From their inception  gold Exchange Traded Funds solidly, irresistibly, absorbed a huge chunk of the available supplies in the market. 
 
But in 2006 institutions that had only ever gone into gold through gold mining shares could now buy into gold itself!   Previously they were simply passengers on the gold price train.   The gold E.T.F. changed all that, far and away more than the formulators of the funds realized!   They aimed at expanding the investor base of gold primarily to bring in these huge mainstream investment funds parked in Pension funds and mutual funds.  They achieved far more than that.   By buying the shares in these gold Exchange Traded Funds, the Funds had to go into the gold market and buy physical gold itself.  This concept brought these past passengers and brand new investors into the driving seat!   They now directly impacted the gold price and ducked the corporate risks attendant on the gold mining shares.
 
How big an impact did they have?   Well the largest buyers of gold annually have been the importers of gold into the Indian gold market which can, when conditions are right take off 800 tonnes of gold per annum.   If we take the gold Exchange Traded Funds sponsored by the World Gold Council [ www.exchangetradedgold.com ] and the COMEX Gold Trust [IAU] [ http://us.ishares.com/product_info/fund/overview/IAU.htm ] we have today a total held of 1,351.82 tonnes held by them.   This is more than the holding of Switzerland.   It is more than the holding of China and most other central banks. These funds by no means cover the entire spectrum of gold Exchange Traded Funds.

The 8 tonnes added to these two funds last week was more than five times the amount sold by the European Central Banks and more than the combined purchases of Russia and China in the open market [this excludes the amount bought by these two countries from local production].
 
Has this new demand peaked?   By no means!   The liquidity of these funds is now capable of attracting the largest of traditional gold bullion holding institutions [who need this extent of liquidity to enter and exit these funds].   

If 1% of the total investment in U.S. Stock Exchanges moved into gold Exchange Traded Funds and one tonne of gold around $32 million, the gold price would race well over $2,000.   Now add to that the other facets of gold demand including that from Asia and you have a bull market that will outperform most others until stability and growth have returned to the global economy.   When that happens, you will see a squadron of pigs circling the roof of the White House.
Julian D.W. Phillips is often quoted by Market Watch and other leading U.S. financial literature and gold websites.   He has followed gold closely since 1971 and is a recognized authority on Gold, Silver and Platinum.  He writes for the weekly Gold Forecaster & the Silver Forecaster- This covers all fundamental and Technical aspects of the gold price in the weekly newsletter.   To Subscribe go to www.GoldForecaster.com & www.SilverForecaster.com

Visit Gerson Lehrman Group: HERE

 

 The investment (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.

Chart for SPDR Gold Shares (GLD)

 

 

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