Monday, 9 March 2015

SPDR Gold ETF - GLD: adding to demand... or to supply?

The decision of the London bank HSBC plc to close its gold vaults, as revealed by Andrew McGuire, has been the talk of the weekend. HSBC is the custodian of the SPDR Gold ETF - GLD. Last year GLD has transferred most of its gold to these vaults.

The gold wash-out of last Friday has been 'explained' by a much stronger American labor market, making a hike of the prime rate more likely. But perhaps there's more nefarious pulling the strings behind the curtain.

The intention of HSBC plc to close its gold vaults certainly didn't evolve over-night. It may induce some clients to sell their gold assets rather than to seek for an alternative storage vault. What more propicious timing for HSBC to funnel through the expected volume for sale to the futures market?  ... and effectively front-running their clients who will realize a particularly poor price.

Last year, the SPDR Gold ETF - GLD has transferred most of its gold to these vaults of its custodian. If GLD holders start liquidating, this will add to that supply, possibly driving the gold futures further down below their equilibrium value (if there is such).

Now, has the SPDR Gold ETF - GLD been adding to demand... or to supply?
The answer is: both. The net demand or supply of GLD can easily been observed when plotting the (public) data series of the amount of gold held by GLD. Here we go:

Volume of gold held by GLD since the SPDR gold trust was created in 2004
By the end of 2012, the gold volume held by GLD amounted to over 1350 metric tonnes of gold, which is half of the global mine production for that year: Six months of production being pent up in an investment vehicle certainly has added to the demand during the preceding eight years. This 'first of its type' ETF builds up inventory at about 200 tonnes/year during the first few years, reaching 600 tonnes by the end of 2007.

Adding to demand

As the demand builds up during and in the aftermath of the financial crisis, GLD adds close to 500 tonnes to its inventory during that period, contributing to the rapid recovery of the gold price and its regaining $1000 in less than one year after bottoming barely above $700 in October 2008.
The announcing of QE-1 causes another rapid rise of the GLD inventory, but afterwards it more or less goes sideways. There is little or no added volume as gold makes its final rally to its August 2011 ATH.

Adding to supply

During the first half of 2013, the GLD inventory shrunk from near its 1350 tonnes maximum to below 970 tonnes by the end of June, when gold hit a low of $1192 (only little above the current price level). It doesn't end there: as gold prices recover over summer but eventually give way again towards the end of 2013, the GLD hoard further slides to below 800 tonnes. Adding several months of gold mine production to global supply is exactly as disruptive for the gold price level as the rapid inventory building up had been over late 2008-2009.

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