The world’s largest asset manager has temporarily suspended the creation of new shares of its gold ETF due to the demand for physical gold. BlackRock announced it would temporarily stop issuing new shares of Gold Trust (IAU) on Friday:
Since the start of 2016, in response to global macroeconomic conditions, demand for gold and for IAU has surged among global investors. IAU has $8 billion in assets under management, and has expanded $1.4 billion year to date. February marked its largest creation activity in the last decade. This surge in demand has led to the temporary exhaustion of IAU shares currently registered under the ’33 Act.”
As ZeroHedge pointed out, this is an ominous sign.
It appears the huge demand for physical gold (and lack of supply) is finally catching up with the manipulation of paper prices. If this is anything other than a brief technical suspension, it could well unleash panic-buying as we already pointed out – there is no physical gold.”
What does ZeroHedge mean by “there is no physical gold? ”
Well, after hitting a record low of 120,000 ounces in early December 2015, COMEX Registered Gold inventories declined another 73% in one day in late January. That left less than 74,000 ounces to cover 40 million ounces open interest (the total number outstanding of derivative contracts that have not been settled).
COMEX stores physical gold for banks and their clients. The gold warehoused by COMEX can be used to settle futures contracts, transferred, or simply withdrawn. It is also used to “back” paper gold. COMEX gold is categorized as either “registered” or “eligible.” Registered gold is available for delivery to settle futures contracts. Eligible metals are stored on behalf of banks and private parties, but are not available delivery. In late January, 201,345 ounces of the total 275,325 ounces of COMEX Registered Gold was transferred to eligible – making it unavailable for delivery.
The move dropped the inventory of COMEX Registered Gold to its lowest level in more than 20 years, and it meant, at the time, that there were only 2.3 tons of gold available to satisfy delivery requests based on accepted protocols.
ZeroHedge explains the significance:
The 40 million ounces of gold open interest and the record low 74 thousand ounces of registered gold imply…there was a whopping 542 ounces in potential paper claims to every ounces of physical gold. Call it a 0.2% dilution factor.”
Simply put, there are a lot more paper claims on gold than there is actual gold backing those claims.
This is one reason gold ETFs aren’t a substitute for owning physical metal. While they are “backed by gold,” the amount of actual metal may or may not correspond with the amount of paper out in the market.
Gold-backed ETFs have a place in an overall investment scheme. But for security in the event of a crisis, they simply cannot replace physical gold.