GLD Acquires 3 tons of paper gold

[joe_momma]

http://www.zerohedge.com/article/gld-adds-3-tonnes-gold-overnight-new-record-has-added-124-tonnes-past-month-even-gold-price-

GLD claims to have added another 3 tonnes of gold to a fresh new all time record of 1,316.18 tonnes as of close of business today. In the meantime the fixing price of gold is back to near record levels... which is where it was on May 11, when GLD held over 124 tonnes of gold less.

In other words, the world's biggest real time acquiror of the precious metal has added more than all central banks purchased in Q1 (if one ignores that whole Saudi Arabia snafu which we posted first last week), and the price of gold has not budged by a penny. Well played JPMorgan, well played.

[Sparky]

For every tonne of gold that they buy, someone is selling a tonne, so their purchases don't have to lead to price increases.

Most people don't understand how GLD works. Their job is to regulate the share price to track the gold price. When share demand is too high (compared to the price of gold), they sell shares to buy gold. When the share demand is too low, they sell gold holding to buy back shares. So when they are buying gold, it just means that GLD share buyers are outpacing physical buyers.

Those interested in the relationship between GLD's gold holdings and the gold price, please read: http://www.zealllc.com/2009/gldetf5.htm

I don't buy GLD because it is not a replacement for physical, and it is not a replacement for mining stocks. However, I'm glad it exists because it will be the primary vehicle for allowing gold prices to soar, even though the purchase/price relationship doesn't hold every day.

[Trinity]

Sparky, if GLD never existed might have investors/speculators bought more physical instead? Creating more of a a physical squeeze compared to paper Gold investing.

[Sparky]

Sparky, if GLD never existed might have investors/speculators bought more physical instead? Creating more of a a physical squeeze compared to paper Gold investing.

Ultimately, no. The only way gold gets to $3000 is if there is substantial demand from wealthy people who are accustomed to amassing fortunes electronically through paper trade. Without that, there cannot be enough physical squeeze to support those high prices.

Remember, gold is difficult to extract, which is why it costs $650/ounce to get out of the ground. Yet with gold at $1200, there's going to be a lot of gold extracted and brought to the table, and the higher the price gets, the more "hard to get" gold will be gotten. The only way the price can accelerate upward from say, $1500 gold is if there is BIG money coming in to soak up the supply at such lofty prices. That would not happen without the GLD. There will ultimately be a lot of rich cats out there who wouldn't bother to buy $10 million in gold if they had to deal with the logistics of securing 5 or 10 thousand physical ounces, but would be willing to make a phone call telling their broker to press a button and buy it for them.

This is particularly true for those of you who think gold is going to $10K. I don't think that will happen, but I think it is a plausible scenario only because of the convenience of GLD for big players.

It's funny how people here don't realize what the GLD will ultimately do for the price of their physical holdings. I don't buy the GLD, but I'm glad that other people do.

I should also point out that for the same reason, the ultimate gold peak price during this bull will spike well above its stable price, which is why I think $10K gold is not out of the question. During the next gold bear market, starting in 2015-2020 and running out beyond 2030, the floor of the price will probably be $1000. What we don't know is if it will spike to $3K or $10K before the next bear starts. Either way, tell your children to buy gold for $1000 in 2035. It will be like buying gold for $270 in 2001.

[Trinity]

Do you think Gold had it's big shakeout already (2008) like the one Gold had in 1975/76 Sparky?

[Sparky]

Do you think Gold had it's big shakeout already (2008) like the one Gold had in 1975/76 Sparky?

I don't have a good intuition about this. I wouldn't be surprised either way if 2008 was it, or if there is one more monster drop left to survive. Imagine if on its way to $3200, it dropped from $2000 to $1250! Think that would shake a few weak hands? To me, $2000 is the lowest plausible top, so a major shakeout from that level would be tough psychologically. Their will be a lot of soul searching on gold bets at the $2K price. That will be the point to decide whether to get out and take a tidy profit, or stay on for one last rocket ride, with the downside risk being a 50% loss to $1000 that won't be recovered for another two decades.

For me, the physical holdings will be easy to hold onto. My paper holdings will be a tougher decision. I will be more willing to bail out of those at a lower price.

[joe_momma]

Sparky - I'm a bit confused - (sorry) -

A net gain in GLD's deposits of 124 tonnes implies there were 124 tonnes exchanged on the open market for cash (as more investors purchased shares in GLD that cash was used to acquire physical).

That is a fairly large amount of gold to move - I've no problem with there being buyers - where I'm getting lost is where did the physical sellers come from? In theory the sovereign and IMF funds have to disclose sales so it didn't come from there.

Were there enough privately that both held physical inventory and wanted to sell? Possible, though it seems with the recent run up in POG that there shouldn't be all that many people making bad bets. (The $3.7 Billion or so in cash proceeds is a drop in the FRN ocean, so there'd be no ripples there.)

[Sparky]

You have to keep these numbers in perspective. In the 6 week period that GLD bought 124 tonnes, there were about 300 new tonnes mined. About 400 tonnes get traded every month. So the physical sellers are there to meet the demand of the buyers.

[scofield]

Very nice discussions here about exit strategies and long term views.

I also think 2000 will be my first sell point, simply to take some profits to pay off a bit more principle in my mortgage.

My plan is to sell some, wait and see. If 2000 turns out to be like 400 gold in 1979, then we will see a multi-month high level consolidation half-way pattern before the final launch. That will give me plenty of time to get back in if I find that gold is actually consolidating rather than crashing - like it is doing now at 1000 Euros

Here are 1979-1980 charts for reference

http://www.bullnotbull.com/images/graphics/gold-1979.gif
http://www.bullnotbull.com/images/graphics/gold-1980-2.gif

[scofield]

p.s. I believe paper gold will do better at the end than physical because it is so much easier to sell paper on the spike than physical. Can you imagine coin dealers buying your gold at spot on the day it jumps 10% in one day?

[Trinity]

I can only imagine what the people who bought at 50 bucks an ounce where doing when Gold was hitting all these peaks and drops in '79 scofield.

Sparky your chart lineup of the s+p lows in 1974 and 2009 you did at GIM worked out pretty close with the seventies. Can you do a similar one with Gold matching the September of 1976 bottom (105 dollars) with the October of 2008 bottom (700 dollars)? If not no biggie.