zealllc.com / By Adam Hamilton / August 16, 2013
The flagship GLD gold ETF has suffered a radically unprecedented mass exodus this year. The capital fleeing this single vehicle was the primary reason gold plunged so dramatically in 2013’s first half. But just this week, money started flowing back into GLD for the first time in months. This likely marks the dawn of the GLD exodus’s reversal, which is wildly bullish for gold. Falling stock markets will play a critical role.
The GLD gold ETF is now formally called SPDR Gold Shares. Rising from modest beginnings nearly 9 years ago, it has grown into a dominant force in the global gold markets. This is because GLD acts as a conduit for the vast pools of US stock-market capital to easily and quickly flow into and out of gold bullion. These capital flows can greatly affect overall gold demand over short periods of time, buffeting gold’s price.
If GLD operated like a closed-end mutual fund, issuing a fixed number of shares one time at its IPO, this wouldn’t be the case. GLD would have zero impact on the gold price after its initial bullion purchase. But GLD isn’t structured this way, its primary mission is to track the gold price. And there is only one way to accomplish this. Both excess supply and demand of GLD shares have to be directly shunted into gold.
When stock traders get excited about gold, they buy GLD shares at a faster rate than gold itself is being bought. Thus GLD’s price rises faster than gold’s, and it threatens to decouple to the upside and fail its mission. In order to prevent this and bring GLD’s price back in line with gold’s, this ETF’s custodians have no choice but to meet this excess share demand. So they sell new GLD shares into the market.