Authorities dispute that the ETF, which owns less than 0.01% of all the world’s gold, affect the price of the metal. A study last year from the Securities and Exchange Commission looked at the relationship between spot-metal prices and asset flows for funds backed by commodities including silver, gold, platinum, palladium and copper. The study found no evidence that fund flows are related statistically to price changes, according to a Nov. 6 filing from the SEC.
The SPDR Gold Trust, created by the World Gold Council in November 2004, is the biggest ETF tracking the price of the precious metal, with a market value of $50.6 billion. State Street Corp., based in Boston, is the sales and marketing agent for the fund, which is physically backed by gold bars deposited in a London vault. It’s one of at least three such U.S.-based ETFs. New York-based BlackRock Inc.’s iShares Gold Trust had a market value of almost $8.9 billion on April 16.
New stock in the ETF is created by banks, brokerages and other financial institutions that are authorized to swap the underlying metal for blocks of ETF shares. The mechanism helps the share price stay close to its net-asset value as investors close the gap between the value of fund shares and gold. The process of redeeming shares works in the opposite way, with the broker taking the physical metal for baskets of shares.
Institutions have stepped up redemptions this year as the selloff accelerated. The ETF’s shares outstanding have fallen for the past six days and declined 6.1% to 380.8 million this month, the lowest level since May 2010, based on data compiled by Bloomberg. The ETF hasn’t seen an increase in shares since March 19, according to the data.
“If you see the shares outstanding dramatically being reduced, the takeaway there’s clearly less demand for gold,” Chris Hempstead, director of ETF execution at broker WallachBeth Capital LLC in New York, said by telephone. “What you’ve seen is in an outflow or an exodus of sorts.”
The plunge in gold started on April 2 as the strengthening dollar curbed demand and Societe Generale SA said gold is in a “bubble.” The metal, which has advanced every year since 2000, posted a three-day drop of 3%.
Speculators held a net-long gold position of 47,164 contracts in the week ended April 2, down 76% from October, U.S. Commodity Futures Trading Commission data show.
Futures fell 1.8% on April 10, the most in five months, on concern Cyprus will sell the metal. Cypriot authorities committed to sell “the excess amount of gold” owned by the state, yielding an estimated 400 million euros ($522 million), according to a draft of a European Commission report obtained by Bloomberg News.
Concern also grew that the Fed is getting ready to end its program of bond purchases, potentially reducing demand for precious metals as a hedge against inflation. Federal Open Market Committee members “thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end,” minutes released on April 10 showed.