I first recommended GLD on Power lunch back in 2005. The Gold ETF was under $50, and the rec was greeted with widespread skepticism. The basis for the call was the 1% rate level that had set off a spiral of inflation in everything priced in US dollars or credit.

But I had no idea at the time of the history of how GLD came about. Today’s WSJ uncovers the tenuous beginning of the world’s largest private owner of bullion.

Here’s the WSJ:

“The innovation that opened gold investing to the masses and helped spur this year’s record-breaking bull market was hatched in an act of desperation by a little-known gold-mining trade group.

The World Gold Council, created to promote gold, was fighting for survival. Its members—global gold-mining companies—were frustrated with the council’s inability to stem two decades of depressed prices and find buyers for a growing glut of the yellow metal. Eight years ago, they were considering withdrawing funding from the trade group, a move that would have effectively shut it down…

What the council eventually managed to create in those dark days surpassed its wildest dreams: SPDR Gold Shares, the exchange-traded fund launched in November 2004. The fund, known by its ticker symbol GLD, has ballooned into a $56.7 billion behemoth.”

The Journal tells the history of how the Gold Council launched the fumd, and the problems they had to overcome. Its well worth reading.

The one thing that I’d like to know about the various gold funds is how much physical Gold they own relative to paper gold, i.e., futures. Some estimates are that the demands on Gold relative to paper is a high multiple on the order of 100X. Does that mean the price is artificially juiced, or that demand outstrips supply? I’ve seen interesting arguments on both sides of the debate.

Here are some more GLD tidbits:

• The gold council spent $14 million developing the fund;

• GLD is the fastest-growing major investment fund ever.

• Asset value: $56.7 billion making it the 14th largest ETF.

• Revenue is a percentage of net asset value, set at 0.15%

• Its the world’s largest private owner of bullion

• GLD buys $30 million of gold daily

• All of the ETF bullion is stored in vaults in London

• GLD has now locked up nearly 1,300 metric tons of the world’s gold supply

• Estimate are gold-backed ETFs have added about $100 to $150 an ounce to the price of gold.

• Between 60% and 80% of GLD investors had never bought gold before;

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Source:
Behind Gold’s New Glister: Miners’ Big Bet on a Fund
LIAM PLEVEN and CAROLYN CUI
WSJ, NOVEMBER 25, 2010
http://online.wsj.com/article/SB10001424052748703628204575618602535514506.html

Category: ETFs, Gold & Precious Metals

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

18 Responses to “The Strange and Interesting History of the GLD ETF”

  1. Stuart says:

    GLD shares can be exchanged for bullion in the event of COMEX default. This says much. The GLD does NOT have the PHYSICAL bullion backing up its shares. Perpetually rolling over futures contracts is not the same as possessing the bullion itself, holding it in inventory and subject to open and transparent auditing. You cannot hold up a futures contract and claim you have physical bullion in inventory. Paper is paper, regardless of form. This ETF is a tracking vehicle, nothing more. GATA and many others have tracked and documented this ad nauseum to date. There should be no further debate on this except by those who benefit from continue obfuscation and denial.

    If anyone wants to participate in gold price movements by buying this ETF, fine, but do NOT buy this ETF believing you own physical gold or can redeem you shares for bullion, you can NOT. Same goes with the SLV.

    The fact that as I alluded to above, GLD shares can be swapped for physical bullion if the COMEX defaults on delivery is outrageous. Imagine someone buying wheat futures and being given shares in an agricultural ETF if the exchange defaults on wheat to deliver at the time. Clearly unacceptable yet for some reason, it’s tolerated in the precious metals markets.

  2. Rob King says:

    @Stuart, agreed. Instead of GLD, I’m surprised more people don’t pick up PHYS instead.

  3. and find buyers for a growing glut of the yellow metal

    ==============================================

    What?!

    At the time of the fund’s creation there was a several THOUSAND ton deficit that JPM was desperately trying to plug with paper (which is where the original paper leverage came from). Talk about rewriting history. The fun for gold bugs back then was the wild roller coaster rides every time they had to roll their positions to the next contract months. If anybody with substance had taken a position and taken delivery they would have bankrupted the gold shorts.

    Man, even I can remember that and my memory isn’t too good

  4. machinehead says:

    ‘GLD has now locked up nearly 1,300 metric tons of the world’s gold supply.’

    One could imagine the potential for a self-reinforcing supply shortage caused by momentum-based buying of the ETF, which responds by locking up even more of the gold supply.

    You and me — we’re ALL the Hunt brothers now! We’ve got ‘em cornered!

  5. @stuart

    The last time I checked they weren’t even required to deliver gold. Didn’t they change the rules many years ago (when they were losing control of the market) to allow for the payment in a fungible asset if they were unable to deliver?

  6. @machinehead,

    Sure we do. The only problem is that they reserve the right to change the rules in the middle of the game. I’ve seen that happen too many times to have any faith in being able to corner these guys. Gold will go up with their permission methinks

  7. Stuart says:

    @ How the Common Man Sees It

    Yes, that is correct. Nice eh.

  8. machinehead says:

    @Common Man,

    You mean a ‘reverse uptick rule,’ for instance? As in, you can only buy GLD on a downtick?

    Doubtless the ever-watchful authorities have plans for ‘Silver Thursday, the sequel.’

    Gold Tuesday, anyone?

  9. CTX says:

    BR- S O S Theres a lot of us who have been riding the gold bull market for many years, way before you got on the bandwagon

  10. KidDynamite says:

    barry – what did you mean by “GLD buys $30 million of gold daily” ??? Can you clarify that “tidbit” please? GLD doesn’t buy any gold at all. In fact, they should be SELLING gold daily to pay their expenses.

  11. huxrules says:

    I don’t think that it matters if GLD has a silo of gold somewhere. For many people the buying of Au (Gold) is as a hedge against some world ending disaster. Even if GLD is backed totally with the real stuff how do you think you are going to get it? If it’s the end of world situation it’s not like they are going to Fedex you a gold bar.

  12. HububBub says:

    @Stuart

    You might want to read the GLD prospectus before posting misinformation. A look at the semi-annual physical audit and audited financials submitted to the SEC might be helpful too. Perhaps B. Ritzholtz, esq. can inform us what happens to those who violate New York Trust law, as you insinuate.

    @KidDynamite

    I interpreted that number to be the value of the average amount of gold authorized participants bring to the trust in exchange for baskets. Since a basket is exactly 10k oz, this looks like a guestimate.

  13. HububBub says:

    O, and of course you are right that they do not “buy” any gold, that merely swap baskets for the gold, but hey, what do you expect from journalists. And with an expense ratio around 40 bp, sells are pretty small and infrequent.

  14. snowdude says:

    I’ve been following this gold (and silver) story off-and-on since the early ’70s. Views on it have polarized very strongly in the last few years in a way that is almost religious in nature. (Maybe that’s an indicator that something big will happen soon in this sector.) Which camp you are in seems to depend on things like your age and where you live.

    For those who have doubts about the future of the US dollar (or other western currencies, particularly in Europe) as an effective store of their hard-earned wealth, gold has become a critical factor. The ability to get actual physical for them is fundamental.

    For those who see no reason to doubt the currency regime we have all been living with for the past 39 years, I hear less concern about physical vs. paper. In fact convertability of funds with structures like PHYS becomes an added cost and distortion for anyone who wants to capitalize on the latest “boom”.

    Europe is now on the brink of possibly reliving the collapse of their currency(ies) and ‘old money’ seems to have been piling into gold for several years now. The US is still the big giant market and still relatively stable, despite the obvious challenges. The value of the dollar has actually collapsed itself in value (depending on what you compare it to) since its current incarnation in 1971, but no one has really felt it as much (unless you remember the inflation days) as they might have if it was a small European country. That’s probably due to the fact that most things people consume were (and are) produced either in US dollars or now, pegged equivalents.

    I am no expert on global finance, but I have a bit of an uneasy feeling that if countries like China ever decided to drop their peg to the dollar, the impact on US consumers could probably be dramatic and quite rapid. I understand a lot of politicians believe that would be a great thing because suddenly manufacturing would bloom again domestically. That may or may not be true. Either way, it would take time and it could lead to a lot of severe shortages in the mean time. And if those pegs were dropped, what happens with all those countries storing their own reserves in dollars (and bonds/Treasurys)?

    Back to the gold/paper thing, is it possible we could have peaked already with the “boom” hoopla crowd? I have been holding a little bit but I expect it will begin declining for an extended period as the boom thrill wears off. Then the big question is, will there be some kind of panic trigger to undermine the dollar that will shift everyone back into gold, and if so, when. If that occurs, would we see a split in the market between the price of physical gold and the price of paper gold? We need to find someone with a good crystal ball!

  15. Stuart says:

    Good info here on this ETF

    http://www.gata.org/node/7586

  16. KidDynamite says:

    Stuart – you’d be best served by not getting your gold ETF education from GATA. There’s a reason why GLD is accepted as settlement for physical gold – because THEY OWN NOTHING BUT PHYSICAL GOLD.

    The WSJ article in question here was actually an interesting look at the motivation behind GLD’s creation, aside from their misunderstanding of how the product actually works:

    http://fridayinvegas.blogspot.com/2010/11/why-is-gld-so-hard-for-people-to.html

    At least the WSJ article accurately pointed out that GLD has resulted in higher gold prices by making the asset class easily accessible. So many gold-bugs still think that the price of gold would be higher if not for GLD’s existence… like we all would have run down to our corner gold coin dealer and scooped up coins instead….