Silver ETF versus Gold ETF


Yellow Jacket
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A view of the gold ETF movements from the perspective of equity investors:

"Let us get down to the meat of this - what we really think is going on is that the GLD ETF is being used as a convenient piggy-bank to source large amounts of physical gold to satisfy Eastern physical gold demand. It is by far the easiest way for the Authorized Participants (who also happen to be major participants in the London Gold market) to get significant amounts of gold that they can ship to Indian and Chinese buyers."

"Investors need to remember that we're talking really large amounts of gold here on a monthly level that China needed to import. For example, 100 tonnes of gold is equivalent to a little over 3.5 million ounces of gold. To put that into perspective, the total available gold (registered gold) held at the COMEX is currently around 800,000 ounces, or only 20% of what you would need on a MONTHLY basis to satisfy this demand. If we include every single ounce available at the COMEX, it is only a little more than 8 million ounces - simply not enough to meet surging Chinese demand on any kind of regular basis.

The GLD ETF provides enough gold to help meet this tremendous Chinese demand without driving the price of gold through the roof. Imagine that these bullion banks needed to go to the open gold market to purchase tens of tonnes of gold regularly from different non-ETF sources to ship to Asia - that would drive the gold price through the roof!

Thus the GLD ETF provides a convenient way to source large amounts of physical gold (by redeeming baskets of gold shares) without being forced to buy gold in the open market and drive the price up. Investors should also remember that the ONLY parties that can withdraw gold from the GLD are the Authorized Participants, who also happen to be bullion banks with significant worldwide gold operations."

Fascinating to see who is on the list of those allowed to withdraw physical gold from the GLD ETF:
"As of the date of this annual report, Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (NYSE:USA) LLC, Deutsche Bank Securities Inc., Goldman, Sachs & Co., Goldman Sachs Execution & Clearing, L.P., HSBC Securities Inc., J.P. Morgan Securities Inc., Merrill Lynch Professional Clearing Corp., Morgan Stanley & Co. Incorporated, Newedge USA LLC, RBC Capital Markets Corporation, Scotia Capital Inc., UBS Securities LLC, Virtu Financial Capital Markets, LLC (f/k/a EWT, LLC) and Virtu Financial BD LLC are the only Authorized Participants."

"One tell-tale sign of this is large sales of gold during less active trading hours, which we have seen very frequently over the last few years - last week is an excellent example. The only reason to sell large amounts of gold futures at these times is to drive the price down - it is certainly not the best way to unload large amounts of gold if you wish to get the best price for your gold."

"It is a bit like a game of chicken between the bullion banks and investors seeking physical gold (mostly in Asia). If demand drops to levels that don't require large amounts of ETF gold to meet, then bullion banks can accumulate gold again and put it back into the ETF to save to meet later demand. If demand continues to remain at current levels and the GLD gold holdings are driven down further and further, bullion banks will need to source gold from other source and will have no choice but to drive the physical price up."

"Even if Asian demand subsides a bit in the near term, the large providers of gold outside of the ETFs, the gold miners, are struggling to maintain gold production at current prices. Many of them are barely keeping their head afloat below $1300 an ounce (let alone the silly predictions for $1000 or $800 gold), and they certainly aren't able to invest to maintain future production as gold discoveries have plummeted. Even a fairly small 10% decline in gold production means around 250 tonnes of gold that will need to be sourced from elsewhere simply to meet annual demand."