Wednesday, June 27, 2012

Bears Can’t Convince Gold and Silver ETF Holders

HOUSTON --  Bears in gold and silver have been especially active and vocal over the past while.  We have come to expect that when gold or silver or both are flirting with obvious important technical support levels ($1,525 for gold and $26 for silver).  But the bear’s dour salesmanship that the precious metals Bull Run is “over” is not a convincing story to the largest holders of precious metals exchange traded funds (ETFs).  How do we know?

20120627-GLD

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Well, if the largest holders of precious metals ETFs thought the bear’s predictions of a major breakdown ahead were right, shouldn’t those elephant-size holders of metals ETFs be rushing the exits in, for example, the SPDR Gold Trust (NYSE:GLD) or the iShares Silver Trust (SLV)?

The thing is, they are not rushing the exits.   

Both of the precious metals ETFs are managed by authorized market participants (AMPs) who arbitrage the spread between the current per-share net asset value and the price of gold or silver.  So when the share price of the ETF diverges from the per-share NAV from either excess buying or selling pressure, the AMPs end up either adding or removing shares (and metal) so that the price of the ETF tracks in lock step with the price of the metal, less accumulated fees and expenses. 

That may sound complicated, but it’s actually very simple.  When there is more buying pressure than selling pressure the AMPs have to add shares and metal (which they do in prescribed minimum basket size).  When there is more selling pressure than buying pressure, they have to remove shares and metal and earn money by doing either.  It’s great work if you can get it. 

The simple way to think of it is when the ETFs are adding metal, they are answering  more buying than selling pressure, regardless of the direction of the price.  (And vice versa.) 

With that in mind, with gold having just tested implied technical support and the vocal gold bears pounding the table that the metal is on the verge of breaking that support (on its way to revisit three-digits territory “imminently”), one might think that the big holders of shares in, say GLD, might have been getting the heck out of their long positions.  If the Big Guys who hold GLD were in ‘getting-out-of-Dodge’ mode we can reasonably assume that would cause some very noticeable negative liquidity (more selling pressure than buying pressure and thus, fewer shares outstanding and less metal being held).  So do we see a falling amount of gold being held by the big gold ETF? 

20120627-GLD LT

Nope.  Even though gold has pulled back from its September 2011 highs near $1,900 - to not far above $1,500 - the most popular gold ETF is holding more or less about the same amount of gold it did when gold cut new highs looking at the long-term chart above. 

In fact, if we use September 6 (2011) as the interim top for gold, when it closed at $1,895 in London, GLD held 1,232.31 tonnes of gold then.  As of today, Wednesday, June 27, 2012, with gold $325 cheaper in the $1,570s as we write, GLD reports holding 1,281.62 tonnes, or not quite 50 tonnes more gold than at the top. 

Does that sound like the Big Guys (and Gals) who hold shares of GLD in their hedge funds, or in any and all the other funds, have been running for the exits with their gold holdings?  Does that sound like the snide and triumphant-sounding bears have gotten their gold-is-crumbling advertisement message into the fund’s heads at all? 

We think to the contrary given the figures.  What the data suggests is that as gold has retreated not only have the Big Funds held their positions, we can point to at least a 50-tonne measure of dip buying with this one gold ETF. 

How about the largest silver ETF? 

20120627-SLV

Well, since about the summer of 2011, after silver’s blow-off top, but with silver still able to retest the $40s, iShares Silver Trust (NYSE:SLV), the largest silver ETF has held something between roughly 9,500 and about 10,000 tonnes of silver metal as shown in the graph above. 

More recently, as silver has fallen below $30, instead of SLV holders acting all fearful and rushing the exits, they have been doing a little dip buying instead.  For example, in late April with silver then near $30 and threatening to break lower, SLV reported holding 9,552.14 tonnes of silver metal in their London-based custodian’s vaults.  Today, as we write, with silver trading either side of $27.00, not far above its $26 implied support, the silver trust reports holding 9,875.75 tonnes, or more than 323 tonnes more silver than in April. 

That doesn’t sound like the silver bears have gotten into the thought centers of the funds holding SLV, does it? 

Here’s a longer term chart for reference. 

20120627-SLV LT

Notice that after the blow-off top selloff, metal holdings for SLV more or less stabilized even though silver continued to correct.  To us that suggests that the funds who hold SLV are content to add to their longer term holdings on dips in the price for the metal. 

Kind of like we are, eh? 

The metals bears may have themselves convinced that the precious metals bull is over, but so far, at least, the Big Holders of precious metals ETFs think that’s just “bull.” 

That is all for now.  Carry on.  

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The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

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