Gold [GLD] ETF

Though gold-focused mutual funds used to own mostly companies involved in mining gold, there are now funds that own bullion itself, including the popular StreetTracks Gold Shares

Gold’s meteoric rise is largely due to the popularity of an ETF, StreetTracks Gold Trust “GLD”. Launched a couple of years ago, by the beginning of this month it has attracted assets of more than $19.26 Billion.

Since shares in the trust represent ownership of one-tenth ounce of physical gold, the trust is sitting on 343 metric tons of the stuff, more than the Bank of England — indeed, more than all but 16 of the world’s central banks.

The ETF has more assets than the next five largest gold mutual funds combined, and is the world’s largest trove of gold in private hands. It dominates its marketplace more completely than any comparable investment portfolio. Among technology funds, for example, no single fund is bigger than even two of its biggest rivals.

It has consumed a big chunk of global demand — 13% or 14% of annual mine supply,” Singlehandedly the ETF shouldered aside typical factors affecting the gold market and became the big driver of gold’s price. Traditionally, jewelry demand and hedge-fund speculation were the culprits.

Bullion’s price also surged upward because gold producers decided six years ago to stop hedging their future production, or selling next year’s output at today’s price

With prices at current levels, and cost of extraction having consumed marginal profits due to high energy bills, it is quite likely that producers will start to lock in profits by selling future supply, and reinstating hedges.

If, energy prices were to fall, and remain low, the profitability of extraction would again swell margins, but, would there still be the demand?

Here is the current data;

From the data, we can readily see that the current [and recent past] high prices have curtailed demand within the jewelry and commercial fields.

Also, the high prices have elicited sales of investment gold holdings through coins/bars/etc. The smaller investor, is seemingly cashing out.

As in the initial run up, the Gold ETF’s account still for huge quantities of physical gold. Under the law, GLD will buy or sell the physical, as baskets are purchased or sold;

FUND SUMMARY
The investment seeks to strive to reflect the performance of the price of gold bullion, less the Trust’s expenses. 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 Trust is not managed like an active investment vehicle, and it’s not registered as an investment company under the Investment Company Act of 1940.

Thus, should investors start selling the GLD ETF, the Fund, would liquidate physical gold, thus increasing the supply of physical gold on the market.

The only question that remains is; what would trigger the selling of ETF investment holdings?

*Speculation
*Reversal within US$
*Interest rates rise in US

The interest rates and US$ are really both tied to inflation, of which currently is/has driven the price of gold and other commodities. This inflation bulge was exacerbated via the near collapse of the US Financial system through poor, non-existent lending standards, via sub-prime, merger, share buybacks etc that is currently working through the excesses.

 

Gold

From the comments section, a question on Gold.

Gold currently is simply trading as a currency. The US$ being the reserve currency has been in serious trouble recently due to the Banking crisis. Make no mistake the intrinsic value of Gold as a commodity with regards to industrial use and jewelry is far below current levels. This mega-run by Gold is in response to the almost collapse of the US Banking system.

This crisis has necessitated the cutting of interest rates in an emergency fashion. Thus has an already weak US$ plunged in tandem with the falling rates.

Here we see as the interest rates have fallen, so the 10yr Bonds have increased in price. The market is now starting to suspect that further rate cuts may not be required to further bolster the Balance Sheets of the majority of the Financials, thus, their price has come off, increasing their yield. This will [and has] cause a rally in the US$

With the rally in the US$, the alternative reserve currency, Gold, has sold off.

Therefore with regards to the question of Gold, we basically arrive at the following question; what will the Federal Reserve policy be on further interest rate cuts?

The answer is really in two parts;
*The Banking system has been saved.
*One more rate cut may be required, as momentum is difficult to stop dead in it’s tracks.

Thus, in the longer timeframe, Gold has probably pretty much topped out in this cycle. However, there will be Gold bulls who refuse to buy this argument, thus there will be increased volatility, as there may well be at the bottom of the US$

For my money, Gold as a LONG trade is finished, you missed the boat at $300oz. As a SHORT trade, you are looking at high volatility and the difficulty of staying in the trade.