The mood in the gold market is currently complicated. There are signs of speculative foam, but at the same time speculators’ net long position in COMEX gold futures is near its lows; despite the fact that the price of gold in USD recently hit a record high. One likely explanation is that the big speculators are more focused on gold ETFs than gold futures. The price of a gold ETF that holds physical gold will automatically track the price of gold. Accordingly, there will never be an increase in the amount of gold in such an ETF if the bullish speculators are not enthusiastic enough to drive the ETF’s market price above its net asset value (NIV).
What happens next?
When that happens, an arbitrage opportunity arises for the ETF’s authorized participants, resulting in the addition of Goldbullion to the ETF’s holdings. The lower charts show significant increases in physical gold held by the GLD and IAU, the two most popular gold ETFs. Specifically, the charts show that approximately 400 tons (12 million ounces) of gold have been added to the joint GLD-IAU inventory in the past few months. This is actually not a large amount within the context of the global gold market, but it does indicate aggressive buying of the ETFs.