-- Posted Tuesday, 6 January 2004 | Digg This Article
On December 22nd, Mineweb ran an article entitled, "Gold Bullion Fizzles Out" in which Stewart Bailey made a great deal over the fact that after the initial week of growth of Gold Bullion Securities on the LSE that new gold deposits had declined to zero. Bailey's article then went on to suggest that this might be a bad omen for other gold ETFs such as the planned Equity Gold Trust.
Many readers might have been misled by the article to think that trading volume of GBS had fallen close to zero when that was not the case. What Mr. Bailey failed to mention was that total daily trading volume has persisted above 1 million units per day (over 100,000 ounces) since the fund was listed in mid-December. However the article does quote Dr. Robert Weinberg, CEO of Gold Bullion Securities, as saying that things had slowed down for the holidays.
The reason for the apparent discrepancy in new gold purchases versus total trading volume is at least partially found in the structure of the security itself. Registered shareholders may only purchase new GBS shares in blocks of 4,000 shares by depositing 400 oz gold bars with the Trustee for GBS (HSBC USA in London).
Therefore GBS, like most securities, has a wholesale-retail structure, where institutional investors and brokerage houses deposit gold bars in exchange for shares, and then hold the shares, or resell them to their own clients, or other brokerages through the London Stock Exchange.
In order for the security to trade at all, brokerage houses had to deposit gold in order to create the initial shares for trading on the market. Clearly Gold Bullion Securities lined up some committments from a few major brokerage houses prior to launching the security on the London Stock Exchange, and other brokerage firms got in on the action as well.
One would expect the growth of the total gold reserve for Gold Bullion Securities and other bullion ETFs to be in spurts, while the trading volume of shares on the market follows a more even course. This is what the market has done so far.
The post-new-year trading volume, though somewhat less than the volume during the week the security was launched, is has continued to trade at the level of several tonnes of gold per day. For example, on Tuesday, January 6th, the trading volume was 1.3 million shares (5.41 tonnes of gold) on the LSE.
Due to the irregular growth of ETFs, as both closed-ended and open-ended funds have demonstrated, it is probably premature to make predictions of the future growth of Gold Bullion Securities based on the quantity of new gold deposits over its first month on the LSE. The Australian version of the same security (GOLD : ASX) would be a far better long-term guage of the likely performance of other bullion ETF's in terms of taking gold off of the market than an attempt to extrapolate the first month of data from GBS during an irregular trading month (December).
Looking then at the ASX version, from April 1 through December 15th, GOLD shares issued on the ASX grew from 0.031 to 8.317 tonnes of gold over eight and a half months. The fund's average uptake of gold off the market was 0.975 tonnes per month. (This data is available on the Gold Bullion Securities website at the following link: http://www.goldbullion.com/au/holdings/gb_holdings.php#3.) The following chart shows the growth of GOLD on issue since April.
A close examination of the GOLD data over that period shows that new deposits of gold were usually only made about once or twice per week, and there were even some liquidations during that period. But the average of 0.975 tonnes per month held without much variation.
Like wise the trading volume of GOLD on the ASX has been highly irregular since its launch in April, making attempts to project into the future based on a sample of only a couple of weeks likely to be very inaccurate.
The London Stock Exchange is roughly 16.5 times the size of the ASX in terms of trading volume and market cap. If we multiply the data for GOLD on the ASX by 16.5 we might get a very rough estimate of what is reasonable to expect from the London counterpart, GBS. That calculation predicts that the London version of the gold security might be expected to take up a monthly average of 16 tonnes of gold.
January 9th will mark the end of the first month for GBS, but two weeks of that first month were tied up with the holidays where most everything was slower than usual in the financial markets. As it is, GBS has issued 7.55 million shares to date, backed by 23.48 tonnes of gold. Thus, even if GBS doesn't issue any more new securities before the 9th, it is still well ahead of its predicted average given the size of the London market.
Revising my estimate from last week's article, it seems safe to predict that in the year 2004 Gold Bullion Securities will take up roughly 204 tons of gold, between the UK and Australian issues combined, and possibly as much as 300 tonnes. That, put together with a few of the other gold bullion securites such as Central Gold Trust, Perth Mint Gold and the Central Fund, should create sufficient uptake in the gold markets to completely cancel out the average sales of 300 tonnes per year by central banks over the past five years.
Gold has been in a US Dollar bull market for the past three years, but that has not been the case in many other currencies including the Euro, GPB and the Australian Dollar. The impact of GBS and other gold ETFs on the gold supply should be significant. This year we will probably see gold break upwards in Euros and other currencies, in addition to its well established US Dollar bull market.
Ken Griffith is a regular contributor to The Gold Economy Magazine.
-- Posted Tuesday, 6 January 2004 | Digg This Article