June 22, 2024

Why Have SPDR Gold Trust (GLD) Holdings Dropped As Gold Soars?

The SPDR Gold Shares Trust (GLD) reported that holdings of gold bullion remained unchanged from the previous week, after dropping by 39.67 tonnes for the week ending August 24th.

On a year to date basis, GLD gold holdings have declined by 48.41 tonnes as the price of gold has increased by $425 (30.6%) from the first of the year.  Why would the GLD show a decline in gold holdings as the price of gold has soared?   Even more interesting, the GLD reached a record high of gold holdings on June 29, 2010 when it held 1,320.47 tonnes and gold was selling at $1,234.50.  From June 29, 2010, while gold has soared by $579 per ounce, the GLD has actually seen a decline in gold holdings of 88.16 tonnes.

The decline of gold holdings by the GLD as the price of gold bullion has skyrocketed indicates that investor preference for gold investment has diversified.  The demand for physical gold has soared as the world financial system becomes more precarious with each passing day.  Confidence in paper assets is becoming more fragile as hapless central banks desperately print money and drive rates to zero in a futile attempt to restore economic growth.  Investors looking for the ultimate safe haven feel more comfortable  holding physical gold.

There have been questions raised about  the safe keeping and even the existence of the gold held by the GLD.  Although these concerns appear to be unwarranted, the financial panic of 2008 blatantly exposed the fact that even institutions considered to be rock solid wound up failing.  (Also see GATA dispatch – How exchange traded fund GLD lets you pretend to own gold).

The SPDR website stresses that the gold with the SPDR Trust is deposited in an allocated account.  According to the SPDR Gold Trust,  “An allocated account is an account with a bullion dealer, which may also be a bank, to which individually identified gold bars owned by the account holder are credited.  The account holder has full ownership of the gold bars and, except as instructed by the account holder, the bullion dealer may not trade, lease or lend the bars.”

Another reason why the GLD gold holdings have not expanded is competition from numerous other gold trusts such as the Sprott Physical Gold Trust which has advantages over the SPDR Gold Trust.

In addition, the shares of many gold mining companies are selling at extreme discounts and investors may be moving funds from gold trusts such as the GLD into mining shares (see Gold Shares Are Positioned For Explosive Move Up).

The GLD currently holds 39.6 million ounces of gold valued at $71.8 billion.

Meanwhile, the case for holding gold grows stronger as concerns about the stability of the world financial system continue to increase.

The Wall Street Journal disclosed today that Goldman Sachs, in a confidential report, estimates that European banks will need as much as $1 trillion in additional capital and that the current situation in world markets is similar to those that preceded the 2008 financial panic.

According to the Wall Street Journal, strategist Alan Brazil of Goldman told clients “Here we go again.  Solving a debt problem with more debt has not solved the underlying problem. In the US, Treasury debt growth financed the US consumer but has not had enough of an impact on job growth. Can the US continue to depreciate the world’s base currency?”

GLD and SLV Holdings (metric tonnes)

August 31-2011 Weekly Change YTD Change
GLD 1,232.31 00.00 -48.41
SLV 9,836.18 -89.38 -1,174.77

Holdings of the iShares Silver Trust (SLV) dropped by 89.38 tonnes this week after increasing by 109.08 tonnes for the week ending August 24th.  The SLV currently holds 313.4 million ounces of silver valued at $13 billion.


How Wall Street Pros Made Huge Profits On Silver ETF Crash As Small Investors Sold

The holdings of the iShares Silver Trust (SLV) declined by a substantial 505.10 tonnes from the previous week.  The decline in SLV silver holdings from the all time high of 11,390.06 tonnes reached on April 25th comes in at a hefty 1,448.73 tonnes or 12.7%.  Silver, meanwhile, has declined in price by $8.31 per ounce or 18.3% since April 25th.

Although the price per share of the SLV tracks the price per ounce of silver very closely, the actual bullion holdings of the SLV can fluctuate, sometimes dramatically, from the underlying price movements of silver.  This same situation applies to the SPDR Gold Shares (GLD).

The reason why the physical holdings of the SLV and GLD do not closely track the price of gold and silver is due to the complex mechanism by which Authorized Participants can “create or redeem” shares in the SLV and GLD.  The silver and gold trusts are structured to allow large Wall Street investment firms to act as Authorized Participants to arbitrage against a premium or discount of the SLV or GLD share prices to the underlying net asset value of the Trusts.

Premiums or discounts to the net asset value of the Trusts occur based on normal supply and demand by investors during the course of trading in SLV and GLD shares.  The Authorized Participants routinely reap profits from their arbitrage activities based on the prevailing discounts or premiums .  According to the prospectuses of the GLD and SLV, the Trusts were structured in this manner to allow the price of the GLD and SLV shares to closely correspond to the underlying value of gold and silver bullion.

The Trusts do not directly buy or sell bullion based on investor buy or sell orders for the SLV and GLD.  The Trusts are not structured like a typical mutual fund which liquidates its holdings if there is a surge of investor redemptions.  Changes in the number of Trust shares outstanding and changes in holdings of gold and silver occur only based on the creation or redemption of shares through Authorized Participants.

Premiums or discounts of the SLV and GLD shares to net asset values are normally less than 1% but can expand dramatically when trading is volatile.  For example, on May 2nd, when silver prices were plunging, the shares of the SLV reached a huge discount of 9.87% from the net asset value of silver held by the SLV Trust.  Investors desperately seeking to liquidate their SLV shares caused the value of the SLV to trade at a steep discount to the underlying net asset value of the Trust.

At this point the lucky Wall Street pros who act as Authorized Participants were gladly buying the SLV shares and simultaneously shorting silver bullion, locking in huge profits.  Authorized Participants who arbitraged during this volatile trading profited greatly at the expense of panicky SLV sellers who sold shares of the SLV at $42.79 that were worth $47.51 based on the net asset value of the SLV.  (Pricing data on the SLV share discount was obtained from the iShares Silver Trust web site).

The Authorized Participants who bought SLV shares during the panic sell off then delivered their SLV shares to the iShare Trust and requested that they be redeemed for silver bullion which was then used to close out short positions in silver bullion.  Under this situation, the silver bullion holdings of the SLV decreased since they delivered silver bullion to the Authorized Participants in exchange for redeemed SLV shares.  This is exactly the situation that has occurred during the May silver sell off and it is therefore no surprise that the holdings of the SLV have plunged.

The average investor in the iShares Silver Trust would be hard pressed to understand the “creation and redemption” features of the SLV shares.  Although the SLV can be an easy way for an investor to participate in silver bullion ownership, my investment thesis is to avoid investments that cannot be fully or easily understood.

For investors seeking to establish investments in gold and silver without having to hold the physical metal, the Sprott Physical Gold Trust (PHYS) or the Sprott Physical Silver Trust (PSLV) offer better opportunities.  Both of these Trust hold specific amounts of physical gold or silver which do not change.  Each share holder has an unallocated interest in the precious metals held by the Trust.

All precious metal holdings of the Sprott Trusts are secured not by a bank, as with the GLD, but by the Royal Canadian Mint of the Canadian Government which is responsible for any loss or damage .  The gold or silver backing the Sprott Trusts are specifically allocated by the Mint to the Sprott Trusts.

From a total investment return standpoint, it is also important to note that the shareholders of the PHYS and PSLV are taxed at the capital gains rate of 15% (if held for more than one year) whereas shareholders of the GLD and SLV are taxed at 28%.  For further information see Sprott Physical Gold Trust Advantages Over SPDR Gold Shares Trust.

GLD and SLV Holdings (metric tonnes)

May 25-2011 Weekly Change YTD Change
GLD 1,214.08 +22.74 -66.64
SLV 9,941.33 -505.10 -980.24

Holdings of the SPDR Gold Shares Trust (GLD) increased by a modest 22.74 tonnes from the prior week to 1,241.08 tonnes.   The GLD held 1,280.72 tonnes at the beginning of the year.  The all time record holdings were reached on June 29, 2010 at 1,320.47 tonnes.  The GLD currently holds 39.0 million ounces of gold bullion valued at $59.6 billion.

Should I Buy Gold Bullion or Gold Trust Shares?

Gold trusts have probably been a decisive factor in promoting the ownership of gold and expanding the market to investors who would otherwise not participate in the market. Prior to the establishment of the gold trusts, investors had two primary options for investing in gold, both of which had drawbacks. Gold investors could purchase the shares of gold mining companies or physically purchase gold coins or bars.

The problem with investing in gold stocks or gold mutual funds is that the investment returns may under perform the appreciation in gold bullion. Many gold stocks have vastly underperformed the price appreciation of gold bullion due to company specific issues such as ore depletion, foreign expropriation, environmental problems or financial difficulties relating to the huge cost of mine exploration, development and production. Picking the right gold stock was often difficult.

Physically purchasing gold coins or bullion presents another wide array of problems and costs. Finding a conveniently located and reputable gold bullion dealer takes time and usually entails a trip to the dealer for every transaction consummated. Liquidity is an issue as well since the physical gold would have to be physically transported or shipped to a dealer prior to receiving sales proceeds. Transactions costs on each side of the trade can easily exceed 5%.  Physically holding gold is expensive due to security, storage, transportation and insurance costs.   Gold coins or bullion can also be lost or stolen, the ultimate nightmare for an investor.

Investment in gold share trusts eliminates all of the problems associated with stock selection and physically holding gold. Shares representing an interest in gold can be sold at any time throughout the trading day at market prices.   Investor ownership of gold trust shares represents an undivided, fractional interest in physical gold held by the trust.

Gold share trusts have become extremely popular with investors due to the advantages of owning gold via gold trust shares.  Investors have poured over $57 billion into two of the largest gold share trusts, the SPDR Gold Shares Trust (GLD) and the Sprott Physical Gold Trust (PHYS).

As gold prices continue to increase, the gold share trusts are likely to be the investment of choice for many investors seeking to establish or increase an investment in gold.

Sprott Physical Gold Trust (PHYS) Advantages Over SPDR Gold Shares Trust (GLD)

Investors seeking to increase or establish positions in the gold market have been pouring money into gold trusts. The largest gold trust is the SPDR Gold Trust Shares (GLD) which, since its launch in November 2004, has seen huge investor demand. The GLD currently holds over 39 million ounces of gold valued at $55.5 billion.

The Sprott Physical Gold Trust (PHYS), which began trading on the New York Stock Exchange in late February 2010, is similar to the SPDR Gold Trust Shares in that the investor owns an undivided, fractional interest in gold held by the trust. The PHYS, however, has some major differences from the GLD which may result in an investor preference for PHYS.

As detailed below, the advantages of the PHYS over the GLD are a much lower tax rate on gains and government custody of the physical gold backing the PHYS.

PHYS is not an exchange traded fund (ETF) but rather a closed-end mutual fund trust which means that the physical gold holdings and investor units outstanding do not change.  The PHYS holdings remain constant based on the initial trust offering.  The PHYS holds over 820,000 ounces of gold valued at $1.18 billion.

As with any closed end fund, the net asset value of the PHYS can trade at a discount or premium to the market value of gold held by the trust.   Since its creation, the PHYS has consistently traded at a premium to its net asset value.  The premium has at times reached a substantial 24%.  To avoid paying an excessive premium, potential investors in PHYS should compare the net asset value to the purchase cost of PHYS.

PHYS Premium to net asset value - source: Sprott Gold Trust

The premium paid by an investor to own the PHYS is based on two major factors –  very favorable tax treatment and extremely secure custody holding  of the physical gold that backs the PHYS as explained below.

Discounts or premiums to net asset values also occur with the GLD ETF, based on investor supply and demand during the course of daily trading.  Premiums or discounts on the GLD, however, are extremely small, typically ranging only plus or minus 0.5%.  The very small discount or premium on the GLD is due to the complex manner in which the fund is structured.

The GLD has a complex mechanism by which shares can be “created or redeemed” by the GLD Trust via Authorized Participants.  Authorized Participants are large Wall Street investment firms that profit by arbitraging against a premium or discount to the GLD.  The transactions of the Authorized Participants can result in significant changes in gold holdings by the GLD .  The SPDR Gold Trust was structured in this manner so that the price of the GLD would closely correspond to the underlying price movements in gold.

The PHYS holds 99.5% of its assets in physical gold bullion stored at the Royal Canadian Mint in Ottawa, Canada.  The gold backing the PHYS is specifically allocated by the Royal Mint to PHYS.  The Trust does not invest in gold certificates or other paper instruments.  The Royal Canadian Mint of the Canadian Government is responsible for any loss or damage to the bullion held for the PHYS and the gold bullion is subject to annual audits.

The custodian for the gold held by the SPDR Gold Trust (GLD) is HSBC Bank in London. The GLD prospectus notes that the gold held by the Trust is specifically allocated to GLD and that the allocated gold bars “are not a part of the bankrupt’s estate in the event of the bankruptcy of the Custodian”.  In addition, the gold bars allocated to the GLD are identified by number and updated everyday.  After witnessing the failure of very large banks in 2008, investors may be more secure with a Government custodian.

A very significant advantage of the PHYS according to Sprott Asset Management is that investors holding units for more than one year are only taxed at the capital gains rate of 15% compared to a 28% tax rate on gold ETFs and physical gold coins. The gold held by investors in the GLD ETF is considered to be “collectibles” by the IRS and thus taxed at a higher 28% rate.

The prospectus for the PHYS discloses that the fund does have a physical redemption feature that is exercisable on the 15th of each month and processed at the end of the month, a setup which is designed to discourage redemptions. Given the inconvenience, cost and delays involved in redeeming units for physical gold, the Trust expects that most investors will chose to sell their units rather than redeem them for gold bullion.

The reason why the Sprott Physical Gold Trust discourages redemptions is due to the fact that a redemption would be considered a sale of gold by the Trust for tax purposes and thus be taxed at 28%. The taxes paid by the Trust would be passed on to shareholders who would then be liable for taxes above the 15% capital gain rate based on their pro rata share of the gain. Sprott Management believes that it is highly unlikely that any investors would chose redemption versus selling their units on the market.

In any event, even if a partial redemption of units occurred, the pro rata gains would still result in a tax rate significantly less than the 28% that applies to gains on the sale of an ETF. In the extremely unlikely event that all units were physically redeemed, an investor’s tax rate would still be no higher than the 28% rate that applies to an ETF.

Long term ownership of the PHYS in a non tax deferred account thus conveys significant tax advantages over an ETF.  Net investment gains on the PHYS could result in a 13% higher return than an equivalent investment in a gold ETF.  Investors should consult with their tax expert and read the PHYS prospectus before investing.

Since its inception, the PHYS has had a higher return than the GLD.


The PHYS fund is managed by Sprott Asset Management based in Toronto, Canada. Sprott offers hedge funds, mutual funds, fixed asset funds, limited partnerships and bullion focused funds. The holding company, Sprott, Inc. trades on the Toronto Stock Exchange under the symbol “SII”.