BlackRock suspends gold ETF issuance due to demand - Zero Hedge Article

[KDave]

http://www.zerohedge.com/news/2016-03-04/blackrock-suspends-gold-etf-issuance-due-demand-gold

This is reportedly a temporary suspension, but an interesting development non the less. What are peoples thoughts on this?

[whitesands1]

34 minutes ago, KDave said:

http://www.zerohedge.com/news/2016-03-04/blackrock-suspends-gold-etf-issuance-due-demand-gold

This is reportedly a temporary suspension, but an interesting development non the less. What are peoples thoughts on this?

This is interesting, but a difficult article to fully digest.

I'd say that when things get so difficult to understand then it generally is disguising something.

I like Gold and Silver in hand.  If you keep it safe then no risk of loss of default.

For physical holders does this look like good news;  Loss of confidence in paper gold and therefore the possibility of surging demand for physical gold?

[Scuzzle]

Could it be that pulling profit from the future has reached such a point (in gold anyway) where there is no more room to do it. This could be good news for anyone holding physical gold.

[JB3]

I read it as they've just run out of issued shares. ETCs (which this is) are governed by the 1933 Securities Act and so any new issuances need to be filed before they are sold. Thus, when they run out, they need to file for more then issue them.

 

ETFs, under the 1940 Act, can be continually issued after initial filing. So they never run out.

 

All this means is there has been demand for IAU stock and there's none left in the iShare's treasury. Like a shop running out of bread, it doesn't mean there isn't any more bread, it just means they need to get more in before they sell any more. ETFs on the other hand are a bit more like a bakery - they can just make more to sell.

[Bumble]

Even a temporary suspension is interesting, because it may indicate that the fund managers are having trouble sourcing the gold. It could be just a short term bottleneck, but the author of the ZH article is saying that there is so little physical gold available for delivery from Comex, that it could force Comex to settle in cash, which is no good for the ETF because its charter is to hold physical gold. This would force the managers of the ETF to search elsewhere for supply, and that would be positive for the gold price.

Whether you really want to hold gold in an ETF is another matter. From what I can see, the custodian for IAU is J P Morgan, and the custodian for GLD and PHAU is HSBC. Do you really want to trust these people with your physical gold? They could be leasing it out; they could be using all kinds of accounting tricks to disguise how much they have; they could be leveraging their holdings with derivatives. And if the funds are forced to break up, you can bet that the big investors will get the physical, while the small guys will have to take settlement in cash. If you must own an ETF, I would prefer PHYS, the Sprott gold trust, partly because I have more confidence in Sprott, and partly because this is a closed-end fund, so you know exactly how much gold is in there.

[JB3]

I agree. I hold no ETF gold.

[Scuzzle]

Where do you draw the line on paper ETF creation though 100-1 becomes 500-1 becomes 1000-1 etc so not only has gold been decoupled from the dollar it's also been decoupled from gold.  You might as well have chocolate button ETF's

[Bumble]

Yay, chocolate button ETFs. If you want to invest in those, I suggest the ETC COCO. As far as I can tell, they don't hoard physical cocoa, they just use swaps and derivatives to track the price.

[JB3]

34 minutes ago, Scuzzle said:

Where do you draw the line on paper ETF creation though 100-1 becomes 500-1 becomes 1000-1 etc so not only has gold been decoupled from the dollar it's also been decoupled from gold.  You might as well have chocolate button ETF's

 

Gold ETFs are ETCs. That just means they can't issue new shares without filing them with the SEC - just the same as a company can't. Whether they are fully backed or partially so, with or without derivatives, is down to their listing commitments - their 'charter' so to speak. So, new issuances don't necessarily represent new stocks issued with no new gold - indeed, the implication of the Zero Hedge article (or, at least, what he's hoping to imply) is that the fact IAU hasn't filed for new issuances is that it can't buy the physical gold to do so.

 

So, ETFs shouldn't vary from their 'charter' - if they say it's 100% backed (or even 0% backed) by physical commodity holdings, then they should be. Whether they are or not depends on whether they are run by criminals or not (it's an offence to falsely submit to the SEC). 

 

But the issuance of new shares does not, in itself, represent a dilution of the physical backing. On the other hand, a company issuing new shares often does!

[Bumble]

HSBC fined for money laundering.
HSBC fined for rigging foreign exchange rates.
HSBC fined for rigging LIBOR rates.
JPMC fined for conflict of interest.
JPMC fined for rigging foreign exchange rates.
JPMC agrees to pay out-of-court settlements for dozens of claims.

Yes, pretty sure they are run by criminals.

[JB3]

Not arguing with that. Part of the reason I don't hold gold in ETFs.

 

Just pointing out that new issuances don't represent dilutions. They can issue new shares and have purchased the gold to back them. If they choose not to, that's a different matter.

[HawkHybrid]

how I understand it is the blackrock etf(iau) are temporarily not

going to buy any more physical gold. the inability to issue new

shares is just an excuse to do so. zerohedge is suggesting

supply of physical as a possible reason.

 

HH

[SilvergunSuperman]

The experts we hear from on the likes of ZH etc are always saying that when the demand for physical gold eventually takes off, the paper spot price inevitably will rocket. I wonder if instead we will see action like with silver, where the spot price stays low but retailers add huge premiums onto physical sales, while continuing to pay below spot for it in return. 

We've recently seen HGM increase the premium on sovereigns. Who's to say in a couple of years time they wont be asking 10% on sovs and 8% on all other bullion with the gold spot price still at $1200?

[Bumble]

@SilvergunSuperman I think the answer to that lies in the hands of the sellers, i.e. the mining companies. If they believe they are being shortchanged by a paper fix price that is being held well below the price that buyers are actually willing to pay to take delivery of the metal, they may choose to find alternative avenues for selling their product. Until a couple of years ago, London and New York had the gold market sewn up, but now there are exchanges in Shanghai, Singapore, and the new ABX exchange, that deal only in the physical metal, with no paper trading or derivatives. If these exchanges can win over a significant share of the sellers, by promising a transparent and reliable price discovery mechanism based on physical delivery, it will put a great deal of pressure on London and NY.

[walesdave]

Afraid I'm not clever enough to understand all of this....

I tried explaining 'paper gold to my wife earlier and confused myself so much I gave up

In the simple way of the Welsh valleys I think it boils down to, "if you can't hold it in your hand, it don't really exist"

[HelpingHands]

@walesdave It's like the difference between owning an actual sheep or just holding an I.O.U x1 sheep.

The thing is there are more I.O.Us than there are sheep.  If everybody all of a sudden wanted their sheep at the same time then it will a case of who can round them up the quickest and who will be left with an empty pen.

[sovereignsteve]

9 hours ago, HelpingHands said:

@walesdave It's like the difference between owning an actual sheep or just holding an I.O.U x1 sheep.

The thing is there are more I.O.Us than there are sheep.  If everybody all of a sudden wanted their sheep at the same time then it will a case of who can round them up the quickest and who will be left with an empty pen.

Yes analagous to if everyone wanted to withdraw all their cash out of the banks.

[Bumble]

Here's one way to understand it. At stadium A they have horse racing. Punters can bet on the horses, and bookies adjust the odds to keep a balance between those who are betting for and against the various horses. If there is a lot of betting on one horse, the bookies shorten the odds on that horse, and if there is very little betting, they will lengthen them to attract more bets. In this way, the odds represent the 'price' of betting on a horse. The punters all have to pay their bets up front in cash, so there is no risk of a bet being in default. All of this is standard practice.

But at stadium B they have a different arrangement. Punters don't need cash, they can bet with IOUs. The bookies still adjust the odds according to how many bets are placed to keep the betting in balance, but because the punters can bet any amount they like by writing a piece of paper, the punters can drive the odds in a particular direction by placing huge uncovered bets. To make matters worse, the punters don't have to bet with the bookies, they can just bet with each other, and the bookies still have to take this betting into account when setting the odds. And the punters who bet with each other are allowed to cancel their bets at any time.  

Which stadium would you prefer to go to? Clearly A. If you go to B, you may find that the odds on some horse you would like to bet on have been forced down to some unattractive level, because of all the big punters with their IOUs. Well, B represents London and NY, and A represents the new physical-delivery-only exchanges. At present, B is far bigger than A, but if the genuine punters start to realise what is good for them, they will shift their business to A. We can only hope.

[whitesands1]

(A) every time!  (B) is survival of the most financially intelligent or wreckless.

One of the most attractive features of PM's is holding phyical.

Am I right in thinking their is a shift in the wind toward physical?

As I heard years ago "Paper takes anything"