Why is the Gold ETF (NYSE: GLD) Dumping Gold?‏

There’s something going on behind the scenes at the world’s largest gold ETF, the SPDR Gold Trust (NYSE: GLD).

Over the past seven months, there’s been a massive outflow of gold from GLD’s holdings.

Approximately 3.2 million ounces, or 100 metric tons of gold have been redeemed.

If you’re the average investor, you don’t have the option to redeem shares of GLD for gold. But if you read the fund’s prospectus, you’ll see that you can redeem GLD shares for gold in lots of 100,000 shares.

At current prices that’s over $13 million.

And you might be thinking that it’s bearish for gold prices if the world’s largest gold ETF is being drained of its gold holdings in $13 million increments.

But I think you can make a far stronger case for such an event to be bullish for gold.

After all, GLD is basically the world’s largest off-market publicly traded pile of gold. If people were bearish on gold (and GLD), they would sell their shares of GLD, not redeem them for the physical metal.

In effect, GLD’s gold holdings are a kind of off-market clearinghouse for extremely rich people, banks, and other wealthy institutions. Where else would you be able to buy $13 million lots of gold without creating waves in the marketplace?

The gold leaving GLD’s vaults doesn’t need to be replaced, because it’s being traded for the paper shares. The shares and the gold cancel each other out.

It’s only when GLD has to go into the market to buy gold to back new share issuances that it would potentially create waves in the market.

So why is a mainstream media source like Reuters reporting this story as bearish for gold?

I don’t know. They’re getting it wrong, is the simplest explanation.

But the important thing to remember is that it’s not GLD dumping gold, but rather, a GLD shareholder cashing in their shares for physical gold.

GLD realistically can’t dump gold on anyone, unless they’re redeeming their shares.

Keep a close eye on GLD, and the number of outstanding shares. The more this fund gets drained by the world’s richest gold investors, the more this story will be in the news.

I’d look for any major depletion of GLD as extremely bullish for gold, and it could be a great way to average into your physical gold position using these drawdown events as times to buy.

Kevin McElroy
Resource Prospector