Increasing inventories despite price declines in gold and silver indicates bullish investor sentiment.
The SPDR Gold Trust (NYSE: GLD, Stock Forum) is an ETF, an exchange-traded fund, with gold being the principle and only commodity being traded. On September 23, 2008, the SPDR Gold Trust's gold holdings rose 2% to a record 724.94 tonnes. This is equivalent to 23,307,547 ounces of gold. The trust's holdings increased by 18% (100 tonnes) since mid-September when Lehman Brothers filed for bankruptcy protection, and the turmoil in the financial markets accelerated like a runaway train.
The amount of gold held by the SPDR Gold Trust is staggering. This 725 tonnes of gold is approximately 2.6 times the amount of gold produced by China, the world's leading producer of gold in 2007. In 2007, China produced 276 tonnes of gold, or approximately 9.7 million ounces.
SPDR Gold Trust was originally listed on the New York Stock Exchange in November 2004. The initial offering was based on a pricing of one-tenth of the then current price for an ounce of gold ($439 per ounce was the average price for the month of November 2004). At the end of November 2007, the GLD had holdings of 19.3 million ounces of gold, and has increased its gold holdings by approximately 4.0 million ounces in the last year.
The GLD allows an investor to effortlessly add gold to their portfolio, and also allows institutional investors who can only trade in the stock markets, per their charters, to include gold in their fund's portfolio. The GLD can also be a vehicle for speculators who can buy and sell it at will and not have to concern themselves with all the encumbrances of dealing with physical gold, such as storage, delivery, and assays.
The GLD enables vast pools of capital in the stock markets to flow into bullion. If stock market demand for the GLD exceeds the underlying demand for bullion, the GLD goes out and buys bullion to curtail excessive stock demand into gold. If selling pressure on the GLD is greater than that in bullion, the ETF custodians have to sell gold bullion to alleviate this imbalance. It's the task of the ETF custodian to rapidly equalize gold supply and demand to track the price of gold and maintain the fund’s share price at one-tenth of the price of an ounce of gold.
In the last six months, the GLD gold inventory has increased by approximately 4.65 million ounces (~25%) while the monthly average price of gold has declined from $910 per ounce to $815 per ounce (a 10% decline). During the same period, the silver inventory held in the iShares Silver Trust (AMEX: SLV, Stock Forum), a silver ETF, has increased by approximately 31,000,000 million ounces to 217,000,000 ounces (a 17% increase) while the silver price has declined from $17.50 an ounce to $12.20 an ounce (a 30% decline).
The increasing inventories in both metals in spite of price declines in both gold and silver indicate that investor sentiment is bullish on both precious metals. On September 22, 2008, ETF Securities, a London-based firm, reported that a small outflow from its gold- and platinum-backed exchange traded commodities (ETC) product took place last week while inflows occurred into its silver-backed product.
In comparing the performance of the GLD and SLV over the last year, an investor in the GLD would have received an 11% year-to-date return compared to a 17.5% year-to-date return from the SLV. The total return for both funds over the last year is comparable. The GLD returned 42% while the SLV returned 40%.
In terms of having dollars at risk, the SLV has been a better investment vehicle than the GLD.
