Some Musings on Gold

[*tada*]

Recently it became quite frustrating for gold stackers/buyers (and in general all PMs). Here're some interesting observations and also my take on macro picture

1. Gold price seems to be closely following the Chinese RMB depreciation recently. (yes, dollar strength matters for most times but it seems to be the CNY/CNH that's driving it recently)

     - Due to the trade war liquidity condition in China worsened dramatically (meaning capital control on full force, and there is scarcity of dollar/dollar assets everywhere)

     - Chinese companies are using pm as collateral now to borrow, so when the debt went bad, the bank "foreclose" the pm and leading to pressure on gold

     - The picture below shows RMB (blue line) vs Gold (orange line) going lockdown tick by tick

2. Global gold production is down in recent years, but all gold mined from human history is still there, never deteriorating. That's a lot actually so don't panic when people claim physical stock is strained. In the 70s South Africa over-mined but nowadays China becomes the largest miner. Most other gold miners reduced CAPEX and stayed lean after the price crash. Also, rest assured no one can corner the market in gold. If the next gold bull market starts, it will be very attractive to invest in gold miners though.

3. For gold to do amazingly well you need two things, upward surprise in inflation and downward surprise in growth. This is true for countless economic cycles in the past. US seems to be at peak growth now (as tax cut is already price in and we have best employment numbers in years), and on the other hand inflation looks to pick up (very low right now but can go a lot higher thanks again to trade war). I think there is a very good chance for gold (in USD terms) to surge in the coming years. But hey there are just too many factors and no one in the world can predict gold price even remotely well.

4. Here's a picture of Total Gold ETF holdings (eg. GLD, world's largest gold ETF backed by real gold). Demand is very healthy in this perspective.

 

Happy stacking/collecting/investing! Please let me know your thoughts in comments~

[sixgun]

How do you know GLD is backed by real gold?

https://www.zerohedge.com/news/2016-12-01/gold-etf-mechanics

[*tada*]

50 minutes ago, sixgun said:

How do you know GLD is backed by real gold?

https://www.zerohedge.com/news/2016-12-01/gold-etf-mechanics

Zerohedge (a site I like to read btw) likes to publish articles like these to scare people. The structure of GLD is a trust. The custodian of course can fool you but many institutional players will need to vet (i.e. check storage) before significant investment. If you're a retail investor why should they allow you to visit the vault? They're not sight-seeing business.

There are some hardcore gold fund managers which almost always invest in physical bar only, for example First Eagle. But now they're also one of the largest holder of GLD, and the reason they hold physical is so that they can earn extra money when lending them out

PS: Just realized it's "BullionStar" who publishes that article. I think bullion dealers are definitely threatened by the ETF gold inventions. But let's be fair and both side contributes positively to gold ownership.

[Martlet]

On the matter of production i read this week about recycling.  I knew this happens but I didn't realise quite how productive it is, upto 350g per ton compared to an ore mine producing 8g/ton is considered high quality ore.  I wonder how much of that filters through in the numbers or gets missed.

[sixgun]

1 minute ago, *tada* said:

Zerohedge (a site I like to read btw) likes to publish articles like these to scare people. The structure of GLD is a trust. The custodian of course can fool you but many institutional players will need to vet (i.e. check storage) before significant investment.

So you believe it is backed by gold but you don't know. You cannot withdraw gold, you cannot inspect the gold, you don't even know where the gold is. In reality it is a surrogate for physical. You hold paper and HSBC/JPM have use of the gold. It is used as a slush fund of gold. Gold is 'borrowed' - i would not guarantee come the day of reckoning all the gold is there or any of the gold is there. The same applies to SLV. These ETF's exist to keep the public away from real gold and silver.

[*tada*]

35 minutes ago, sixgun said:

So you believe it is backed by gold but you don't know. You cannot withdraw gold, you cannot inspect the gold, you don't even know where the gold is. In reality it is a surrogate for physical. You hold paper and HSBC/JPM have use of the gold. It is used as a slush fund of gold. Gold is 'borrowed' - i would not guarantee come the day of reckoning all the gold is there or any of the gold is there. The same applies to SLV. These ETF's exist to keep the public away from real gold and silver.

Nope, not for GLD's structure. If GLD cannot buy physical gold to back up the shares they issue they will stop issuing shares. And of course every institutional investor (who represents mom and pop investors) know where the gold is since they do on-site due diligence. For obvious reasons they won't tell mom and pop where they store the gold even if they requested it.  I don't want to argue with you, believe in what you want as there are many conspiracy stories. Also, it's personal choice of holding physical (which you take care of the gold youself) for tail events or choosing a investment vehicle that's liquid and efficient for many aspects.

Similarly, if you invested in Apple's stock and in their financial report they claim they have 10 billion in cash reserve. Do you go and ask Apple to show you their bank account? Yes, everything boils down to trust, and the laws preventing people to exploit other people's trust. The nice thing of fractional ownership is you can own a fraction in an efficient way.

[dicker]

Custodians will absolutely provide safe custody and to a fund manager.  The risk really is not that the custodian will not driver the physical goods (it legally does not own the goods, just provides “safe custody”). The risk is that a fund manager does not purchase and then store gold or silver that has been bought by its clients. 

[dicker]

Exactly right Tada. 

[*tada*]

2 minutes ago, dicker said:

Exactly right Tada. 

Thank you, I was just trying to show the total known physical gold holdings from all ETFs as a gauge of investor demand

 

[dicker]

I think that is a pretty reasonable gauge!

It is hard to work out exactly what demand is because of all of the variable parts of the market.  Happy to be corrected though!

 

cheers

dicker

[*tada*]

25 minutes ago, Martlet said:

On the matter of production i read this week about recycling.  I knew this happens but I didn't realise quite how productive it is, upto 350g per ton compared to an ore mine producing 8g/ton is considered high quality ore.  I wonder how much of that filters through in the numbers or gets missed.

India/China consume a lot of gold in jewelry, which is a large proportion of gold demand.

Others demands come from dentistry/electronics, these gets recycled all the time

 

[*tada*]

3 minutes ago, dicker said:

I think that is a pretty reasonable gauge!

It is hard to work out exactly what demand is because of all of the variable parts of the market.  Happy to be corrected though!

 

cheers

dicker

Agree - gold is the hardest thing to predict really

[*tada*]

39 minutes ago, sixgun said:

How do you know GLD is backed by real gold?

https://www.zerohedge.com/news/2016-12-01/gold-etf-mechanics

BTW sixgun, IAU has a different structure, and allows for double-ownership for lack of a better word, this is what actually concerns people who worried about worst scenarios. That's why, despite being cheaper in management fees, IAU is a much smaller fund than GLD

[jultorsk]

FOFOA has written extensively about GLD - here's one of his exhaustingly long but fascinating (and deeply troubling) reads... http://fofoa.blogspot.com/2018/01/happy-new-year.html

---

"As an investor in GLD, you already know you don't actually own the physical gold, but did you also know that you can never ever own even the shares outright? Because they are "in street name only," all you can ever own is a liability denominated in "GLD shares" from one of the AP [Authorized Participants (e.g. bullion banks)] banks. Just like an unallocated gold credit, or even a dollar in a Bank of America account, all you actually own is a bank liability. The same goes for GLD, and that's why the authors of this paper call the market that investors can participate in "the secondary market.""

---

Just for the record, here's what the prospectus says about the objective of GLD:
 

"The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion…"

There's nothing in there about investors gaining more bullion by investing in GLD. And here's what it says about when new shares will be created:
 

"The Trust creates and redeems the Shares from time to time…"

There's nothing in there about incoming net investment triggering the creation of new shares. There's nothing even about the reason for creations and redemptions, just that they happen "from time to time".

----

"GLD doesn't "purchase" physical gold. The process of adding physical gold goes like this. GLD is a Trust, which has allocated and unallocated gold accounts, as well as a dollar account, at HSBC bank in London. One of the APs asks the GLD Trust to create new shares. The minimum that can be created is 100,000 shares, and it must be in multiples of 100,000 shares. 100,000 shares currently represent about 9,507 ounces of physical gold (less than a third of a tonne). That's called a basket.

In order to create a basket (or baskets) of shares, the AP bank must transfer to one of the GLD Trust accounts at HSBC bank either unallocated gold credits, the dollar equivalent of the amount of gold at that time, or it could theoretically have some physical gold delivered to HSBC via armored truck. In any case, the transfer will be converted into unallocated credits in the GLD Trust's unallocated account, and then HSBC will allocate some of its unallocated gold to GLD within three days of the shares being created. Note that even in the unlikely case that physical gold is tendered in exchange for new shares, it won't necessarily be the same bars that get allocated to GLD.

Notice, also, that nowhere in this process is physical gold purchased by the GLD Trust. HSBC and most of the GLD APs are LBMA bullion banks. They don't purchase gold. They are the gold market, and gold flows through them, like art flows through a gallery."

[sixgun]

@jultorsk careful you are exposing the truth about these cartel scams. GLD is just another unallocated gold account scam. You can never take possession of the gold, you can never see the gold, you don't even know where the gold is, you don't even own the gold - you simply pay the trust fees and carry the can. There is gold there but it acts as a slush of physical. The cartel uses this physical for their own purposes. It is 'borrowed' when necessary. When the time comes i expect all the shares will be redeemed for cash and the public told to sling their hook.

I post the truth about these things. Some appreciate this and some would rather vote up opposing views and carry on in La La Land.

[Big23]

What I don't understand is why would anybody buy something like that? Having between 200 and 100,000£ I would always buy physical PM. Above that you should also be able to find the right storage solution for your stack...

[sixgun]

22 minutes ago, Big23 said:

What I don't understand is why would anybody buy something like that? Having between 200 and 100,000£ I would always buy physical PM. Above that you should also be able to find the right storage solution for your stack...

i have bought SLV and GLD in the past. Take SLV. The spread on SLV shares is less than silver. It is cheaper to buy and sell SLV shares than COMEX contracts. I can sell PUT options in SLV, i get the premium for these contracts. i take this cash as profit. Assuming the options i sold are not exercised, when the options expire i sell more options and do it again and again until they are exercised and i am assigned the shares. So already i bought those SLV at a discount. Then once i have the SLV shares i sell CALLS against the shares. Keep doing this and over time you can get the shares for nothing. You can't do that with physical. Physical is something totally different. It is so much harder.

At the click of a mouse i can buy, sell, short. It is great but i do not kid myself this is really silver. My issue is most of the people dealing with these shares think they have silver. Some might even think somewhere is a bar of silver with a number on, which is registered to them. The only number is the one that is being done on them.

This is one of the reasons i am so keen on the Kinesis currency system, where i will be able to buy the title over silver; title which is in digital form on the blockchain. These are the silver Kinesis coins. i have title over redeemable silver. i have just minted currency doing this. i can hold the coins if i like or sell them and with the returning cash do it again and again and again. Every coin i mint has my name against it - forever. Forever i will get a cut of the transaction fees as it changes hands. This i cannot get with SLV. i will be my own central bank.

[Big23]

@sixgun what you describe is the part of investment that is placed in shares/funds/etc. and not the part of PM. As you stated correctly some people seem to misunderstand that... ?

[HawkHybrid]

9 hours ago, jultorsk said:

"The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion…"

 

gld claims to track the price of gold. it does not claim

in this sentence to be part ownership of physical gold.

it may or may not own physical gold. if you want to

buy physical gold then do so and take delivery in

physical gold. if you want to trade paper formats that

claim to track the price of gold then gld might be

worth a look. why would someone who wants

physical gold go and buy a paper gold tracker?

paper gold has it's place as well as physical gold.

it's very one sided to hold that against them.

 

9 hours ago, jultorsk said:

There's nothing in there about investors gaining more bullion by investing in GLD.

this is flawed. I buy a physical sovereign as an

investment in gold. the gold price goes up. do I

get more bullion for being right? no, but the price I

can sell my sovereign for goes up. expecting gld

to give you claim on more bullion should the gold

price go up is asking for more than you would have

got with physical bullion.

 

HH

[jultorsk]

@HawkHybrid my post was intended as a comment to the original post, nothing more. In particular OP stated: "Here's a picture of Total Gold ETF holdings (eg. GLD, world's largest gold ETF backed by real gold). Demand is very healthy in this perspective." 

You are correct in stating that "[GLD] may or may not own physical gold" - we are in full agreement.

---

There's nothing in there about investors gaining more bullion by investing in GLD.

"this is flawed. I buy a physical sovereign as an investment in gold the gold price goes up. do I get more bullion for being right"

Correct, no you don't. In the article I linked the premise of the discussion is that SEC is worried some GLD investors may incorrectly assume that when they increase their holdings in GLD (say, they own x shares and then purchase y shares more), the Trust would respectively purchase more physical gold to the Trust's "vaults" to back up their increased fiat investment - so that their investment x+y would actually be reflected in the gold bullion total net asset value (NAV, inventory) of the Trust. This is not necessarily true. That's all I'm saying - not judging, not taking any sides one way or another, no investment advice. 

To quote from the linked article: "GLD and "gold" are exhibiting precisely the correct, the stated, the intended and expected relationship, perhaps better than any other ETF in the world, and entirely automatically (without the need for management). That is, GLD is tracking the price of "gold" more closely than any other gold ETF, and perhaps more closely than any other unmanaged ETF."

---

Further: "I’ve said it before and I’ll say it again now, the reporters are getting it wrong when they equate outflows of gold from the ETFs with “sour” investor sentiment. What they need to work harder to understand is that these are NOT actively managed funds whose gold inventory is tweaked to ebb and flow based on public sentiment in the shares. Instead, the ETFs are more like a central coat-check room in which the various bullion banks have temporarily hung out their own inventories (i.e., meaning, their unallocated stock which they hold loosely on behalf of their depositors). And whereas the claim tickets (ETF shares) may freely circulate on the open market, any significant outflow of physical inventory is simply and primarily indicative of a bullion bank reclaiming the original inventory based on a heightened need or desire for physical metal in a tightening market — for example, to meet the demands emerging from Asia."

---

Crude GLD Total Net Asset Value Ounces in the Trust chart I pulled today from http://www.spdrgoldshares.com/usa/historical-data/

 

[dicker]

I think it’s horses for courses.  Different people buy for different reasons. 

Nothing wrong with buying some ETF’s if you are not preparing for a big event where  physicals are a premium, indeed you might want to hold ETF’s for quite a short period of time. 

Likewise physicals are very attractive for multitude of reasons, not least that they are backstop.  @jultorsk thanks for your very lucid description above, I had not thought of ETF behaviour like that before. 

Best

dicker