Who is draining GLD

[Storm]

I just read a fascinating article about how recently there have been some large outflows from the SPDR GLD ETF.  Like most people, I naturally assumed that when you had an outflow from GLD, that meant a bunch of investors sold their stock in GLD, which caused the GLD management to sell physical gold on the open market, causing an outflow.  What I didn't realize was that there is a facility for larger investors who own a basket of 100,000 shares in GLD to redeem them for physical, thus generating an outflow.  So, while it sounds like large outflows should be a bearish indicator for gold, in actual truth, large outflows may just mean that a lot of big market players are using GLD as a way to buy cheap physical at a good price.  It seems like the price of physical bars has been decoupling from the spot price of gold lately, so this might be a way people are getting physical delivery in a tight market.

Check out this article for more info:  http://fofoa.blogspot.com/2011/01/who-i ... g-gld.html

[smurff]

Great blog posting.  I really liked the fight between fofoa and Jeff. 

[melveyr]

Yeah thanks for posting this! Very interesting. I am going to diversify my gold holdings more now. All in GLD is a little too much counterparty risk...

[rickb]

I am going to diversify my gold holdings more now. All in GLD is a little too much counterparty risk...

Good idea.  From Why the Best-Laid Investment Plans Usually Go Wrong: "Since gold is the last line of defense for your portfolio, you have to be sure to handle it properly.  Don't throw away the benefits of of gold by treating it too casually.  Don't put too many pieces of paper, too many people, or too many institutions between you and your gold.  Buy gold that you can hold in your hand."

The ownership chain for gold coins you personally possess: YOU -> GOLD

The ownership chain for GLD: YOU -> trustee (Bank of New York Mellon) -> custodian (J P Morgan Chase, London) -> various subcustodians (undisclosed) -> various subcustodians (undisclosed) -> various subcustodians (undisclosed) -> ... -> GOLD

Let's see.  Direct ownership vs. ownership through at least two major banks, one of which has been sued for allegedly using its custodial metal to suppress the price of this metal (see http://www.gata.org/node/9462).  Hmmm.  Let me think about this.  What would HB say?  Oh, right - 'buy gold you can hold in your hand".

[melveyr]

Haha yes my current allocation is a little bit crazy. My PP is less than a year old and buying physical is totally new to me. I'm excited to make the plunge. 

[Wonk]

One idea would be to diversify into goldmoney.com.  James Turk is a long-time gold guy, not a banker who set up a gold fund--big difference.  They can point you towards a self-directed IRA if you need it.  There are still pieces of paper between you and your gold, but it could be a diversification decision.

[MediumTex]

And what about taxes?  I know this has been discussed before, but I was focused more on the bond part of it.  If someone can easily summarize PRPFX, gold and taxes, it would be appreciated.  Otherwise I'll just dig back into some of the earlier posts.

Anyway, if PRPFX handles gold well on all these fronts, that would certainly enhance it's appeal, even if it doesn't go with the Harry Browne formula.

I doubt if PRPFX has sold much gold and silver in recent years.  The size of the fund has literally exploded--it's gone from a few hundred million a few years ago to ten times that size today. 

I'll bet Cuggino's wife is a big believer in the PP!

[rickb]

Anyone have any comments on PRPFX from these various points of view?

As an open-end mutual fund PRPFX creates and destroys shares daily as a direct result of purchases and redemptions.  To maintain their asset allocation, if enough money comes in they have to buy more gold (and everything else in their allocation), and vice versa, so unlike GLD (or IAU or GTU or PHYS) buying and selling PRPFX has a fairly direct linkage to the physical gold market.

[KevD]

Thanx guys.