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Anonymous ID: 961a18 Jan. 24, 2020, 7 p.m. No.7905642   🗄️.is đź”—kun   >>5806

Are The Underlying Mechanics Of The Largest Gold ETF A Cause For Concern

 

In general, ETFs are funds that hold and track the price of assets like a commodity or stock market index. But unlike normal funds, ETFs are conveniently traded on stock exchanges. ETF securities represent shares of ownership in the fund. In the case of GLD, shareholders own a segment of the Net Asset Value (NAV) of the fund, which mainly holds physical gold. So, owners of GLD shares don’t own the gold itself, but a slice of the fund. As with other derivatives, GLD provides exposure to the price of the underlying asset.The Mechanics Of GLD

Primary market participants for GLD include (from the prospectus dated August 9, 2019):

-The Trustee BNY Mellon Asset Servicing, which is responsible for the day-to-day administration of “the Trust” (the Fund).

-The Custodian HSBC Bank plc (there can be sub-custodians), which stores Good Delivery gold bars for the Trust in London.

-The Sponsor World Gold Trust Services, LLC, a subsidiary of the World Gold Council, which oversees the performance of the Trustee and the Custodian.

 

-The Authorized Participants, which are the institutions authorized to create and redeem GLD shares at the Trustee. (With other ETFs, these are called the Participating Dealers.) At this moment, the Authorized Participants are Credit Suisse Securities (USA) LLC, Goldman Sachs & Co., Goldman Sachs Execution & Clearing, L.P., HSBC Securities (USA) Inc., J.P. Morgan Securities LLC, Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, UBS Securities LLC, and Virtu Financial BD LLC. One GLD share represents 0.1 ounce of gold. (Put differently, the value of one GLD share is equal to the value of 0.1 ounce of gold. And actually, at the time of writing, it’s a little less than 0.1 ounce, for reasons to be explained below.) The price of GLD is set by supply and demand on the exchange where it’s traded (NYSE Arca), just like the gold price is set by supply and demand of gold in the London Bullion Market

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The GLD share price tracks the gold price, mainly through arbitrage. When, for example, the price of GLD trades at a premium to the gold price, an Authorised Participant (AP) can collect a profit. The AP can buy gold, deposit the gold at the Trustee, which creates shares in return for the AP, who can sell these on the stock market. This process will drive up the gold price and lower the price of GLD. APs will jump the arbitrage opportunity until the gap is closed. Naturally, the arbitrage works the other way around when GLD trades at a discount to the gold price. In this situation, APs will redeem shares at the Trustee to get gold out that they can sell in the London Bullion Market.

 

Cap#1: creation and redemption process of GLD shares.

GLD securities can only be created or redeemed in a “Basket” of 100,000 shares. Because one share represents 0.1 ounce, 10,000 fine troy ounces (about 25 Good Delivery bars) are required for creating 100,000 shares of the Trust. Vice versa, 100,000 shares are required for redeeming (withdrawing) 10,000 fine troy ounces from the Trust.

 

Cap#2 gold price and the level of GLD inventory are correlated. The chart suggests that buyers and sellers of GLD contribute to the directional trend of the gold price. Consider, for example, when the spot gold price went up and at the same time GLD inventory swelled. The APs must have been buying gold and creating shares. Their incentive for creating shares was likely that the GLD price (occasionally) was trading at a premium to the spot gold price. However, the prospectus reads that the APs can also “act for their own accounts or as agents for broker-dealers, custodians and other securities market participants that wish to create or redeem Baskets.” And, “Shareholders who are not Authorized Participants will only be able to redeem their Shares through an Authorized Participant.” Implying, if you own less than 100,000 GLD shares, you can’t redeem for gold. But, if you are well connected to one of the APs, and you own a Basket of 100,000 shares or a multitude of that, you can redeem for gold.

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https://www.zerohedge.com/commodities/are-underlying-mechanics-largest-gold-etf-cause-concern