Felix Salmon

ETFs and gold speculation

By Felix Salmon
October 8, 2009

Izabella Kaminska has an interesting take on the record-high gold price, via Bedlam Asset Management: essentially, it’s rising because the big gold ETFs, like GLD, are so incredibly easy to buy and to speculate with. Gold is now something that individuals can easily trade in and out of daily — goldbugs are no longer just hold-it-until-you-die inflation hawks and eschatologically-inclined survivalists.

The implication, according to Bedlam, is that the whole swathes of ETF-linked commodities risk being dumped en masse, if and when the current wave of momentum fizzles out:

One or more of the smaller exotics will expire. Little notice will initially be taken. After a couple more, especially if in different sectors, there will be a rush to dump them all. The good and the bad will be forced sellers alike to meet redemptions. This will lead to an avalanche of physical gold, live hogs and cocoa being heavily sold into often thin markets, causing sharp price declines.

Remember: insofar as gold is being held by speculators, it isn’t safe. And GLD alone has more than $30 billion invested in it, much of that on margin. Where would gold be if even a fraction of that sum got sold at once? I don’t like to think.

12 comments so far | RSS Comments RSS

Gold ads are ubiquitous. I especially like the “woman investors need to think about gold” ad.

Eschatology, it’s not just for dudes.

Posted by VennData | Report as abusive

Huh? If I want to but a share of GLD, someone has to sell it to me. So selling of GLD is occurring all the time…no?

Posted by Cartman | Report as abusive

GLD isn’t a share, where the underlying security is limited by the number of shares outstanding.
If you buy $1 of GLD then the people who run GLD go and buy $1 of physical gold in the open market. The latest price for GLD reflects the price they pay to buy that gold.

Of course someone is selling physical gold to GLD but more physical gold is being pulled out of the ground all the time.

The problem is that (from old info now) something like 25% of the Q109 physical gold buying (i.e. demand for gold) was from ETFs.
Without ETFs many of the speculators would be putting money into something else which means gold would have lower demand and hence a lower price.

Even worse, when you sell your GLD, that physical gold that your ETF represents is ADDED TO THE SUPPLY OF GOLD.
So if there is a run for the doors on GLD the supply of gold can jump VERY FAST. Much faster than it would do if say a new gold mine comes on stream.
All of this should add to the volatility in gold.

Posted by Tiny Tim | Report as abusive

“…an avalanche of physical gold, live hogs and cocoa”. That’s a striking image – is it a Heston Blumenthal creation?

Posted by Al | Report as abusive

There’s much more to the story than just GLD being a popular investment vehicle. When companies like Barrick Gold begin buying back hedges in the amount of $5.6 billion with gold over $1000/ounce, there must be a clear reason to think that gold will continue moving higher. The large spikes in gold correspond to equally large dips in the dollar.

Furthermore, if you’re China, sitting on trillions of dollars in dollar denominated assets, would you not want to diversify with the only “safe” alternative? Indian citizens continue to by enormous amounts of gold. All these factors point to global economic instability as the catalyst, and not the GLD etf.


Gold is safe…Listening to the puppet-heads on the likes of CNBC is bad for your health and your nest egg. Everyone should own enough gold to “bribe the border guards” but one should keep their head when making investment decisions. My 40 years of experience advocates sitting on ones hands for now and letting the cacophony of “newbie” advice subside. Suddenly, “apple picking” and “leaf peeping” may be the best capital preservation tool one could have. To paraphrase Luke in “Cool Hand Luke” … “Sometimes Cash can be a real cool ‘hand’”.

Posted by John P. Crowley | Report as abusive

Purchases of gold ETFs are unique because they purchase the physical commodity. That impacts demand. Other commodity ETFs are buying futures, which doesn’t increase demand any more than selling futures increases supply.

Posted by mwc | Report as abusive

Felix assumes that GLD buyers are speculating on margin. I don’t know that he has that data, so he may be relying on anecdotal evidence. A valid alternative explanation is that ETF buyers are predominantly hedging against future inflation. Traditionally, high net worth individuals outside the U.S. have held higher hedges (around 10% of their wealth) in gold than they do today. Instead of putting on those hedges through bullion banks, they are using ETF’s.

Probably both explanations are true. This would imply more solid underlying demand for GLD than Felix assumes. Further, the gold price has come out of a long (eighteen month) period of consolidation, during which time momentum buyers have been frustrated and probably run out of their positions. Now we are experiencing some modest degree of strength (a relatively weak breakout to new highs). This is hardly a sign of speculative mania. It may yet turn into one, but it is not one now.

Posted by David Pearson | Report as abusive

According to a survey in the U.S., the August market scale of ETF products (exchange traded funds), where there are famous individual investors, has approximately doubled from one year ago to $545 billion. This is becoming a case where the new approximately $218 billion capital from the beginning of the year has flowed out. The remarkable capital outflow in the large scale ETF, which is connected to the stock price index, is indeed a contrasting movement.


Trading gold in instruments is an economic phenomena going back thousands of years. It was after the FDR gold ban that the government erected a tangle of barriers to the efficient trading of gold.

FDR and subsequent progressives set up those barriers with precisely this situation in mind, a situation where the real value of the dollar crashes far below official statistics.

Roosevelt had the gumption to put his money where his mouth was, and in the name of enforcing the official statistics he literally confiscated all private gold in America under war powers. Trading gold was officially illegal into the 1970′s.

Part of this effort involved the reconstruction of history. The long history of low employment high real growth gold economies had to thrown down the memory whole. The very mechanics of the gold standard and gold trading had to be eliminated in the field of economics, students would be impressed with the idea that hard currency thought is a form of immaturity, both academic and personal.

It all seams very silly in the age of the internet, where the contents of all the world news and journals is splashed across any common terminal. For all his machinations, I imagine Keynes never calculated expectations on that…

Posted by anon | Report as abusive

Yes, we all don’t like to think about possible consequences don’t we?
If these ETFs have anything to be frightened of, it is not private speculation but market manipulation by governmental and quasi-governmental entities. The ETFs and greater leverage involved could add quite a bit to volatility, but I think the fundamental underlying reason for the big price moves is still there – the fear of a continuing devaluation, possibly a complete meltdown of the value of fiat currencies, the Federal Reserve Note in particular. For us, the prices of our antique jewellery constantly fluctuate, and holding on to them seems like a pretty wise idea.


Posted by onotoman | Report as abusive

Hmmmmm ..There is a run for the doors on GLD the supply of gold can jump VERY FAST.

Posted by trademetals | Report as abusive

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