An analysis by victorthecleaner (http://victorthecleaner.wordpress.com/2012/06/01/gld-the-central-bank-of-the-bullion-banks/#more-1014) revealed the correlation between inventory changes at GLD the biggest gold ETF and near term gold price changes.
Main point: sizable loss/reduction of GLD inventory, say by 250,000 ounces in one single day, leads to near term gold price strength/increase.
Main point: sizable loss/reduction of GLD inventory, say by 250,000 ounces in one single day, leads to near term gold price strength/increase.
Possible explanation: the big banks who are authorised participants AP) for GLD (kind of market maker for GLD) trade paper gold on behalf of clients, issues gold denominated credits themselves (paper gold sold to clients), and maintain a certain level of physical gold as reserve to satisfy clients' delivery demands.
The APs operate their gold banking on a fractional reserve model, just like normal dollar banking. How do they manage their reserves in relation to outstanding credit? they use GLD as their gold central bank.
The APs operate their gold banking on a fractional reserve model, just like normal dollar banking. How do they manage their reserves in relation to outstanding credit? they use GLD as their gold central bank.
When the APs receive physical gold in excess of their reserve requirment, they deposit the gold with GLD, and GLD will issue GLD units to the APs. These APs can lend the GLD units out, receiving an income, while the borrower of these new GLD units would sell the them (the short seller).
This is when GLD inventory goes up.
On the other hand, if, for some reason some clients of the APs demanded delivery of sizable physical gold, then the AP will experience decline in gold reserves, and if they fail to replenish the gold reserve by other means, they will buy GLD units, and redeem them for physical gold to replenish depleted reserve.
Therefore sizable decline in GLD inventory is a sign of heavy demand for physical gold.
To discourage physical gold demand, these APs would manage UP gold price to deter, or reduce physical gold demand.
Along this line of logic, GLD inventory increases imply that the APs have replenished their gold reserves, and therefore supply of paper gold will increase (fractional reserve banking). This signals gold price weakness near term.
Website to monitor GLD inventory change: http://www.spdrgoldshares.com/
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