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I’ll never recommend GLD, the SPDR Gold Shares ETF.
If you want to trade options on gold and you don’t have a futures account, I guess it’s a fine proxy, but otherwise, I don’t think it’s a useful investment vehicle. If you want the upside of owning physical gold, I think you should probably hold it yourself or in a private vault or similar.
It is however a useful metric to gauge investor sentiment and interest in gold.
That’s why I frequently look at the relationship between GLD holdings and the price of gold.
Right now, GLD’s share count is ~25% lower than we typically see near a top in the price of gold.
You can see the tops in gold’s price in 2011-2012 and 2020 both coincided with huge GLD share counts.
The way GLD works is, when the Net Asset Value of the fund falls below the GLD market price, Authorized Participants (banks/hedge funds, etc.) buy physical gold and deliver it to GLD, and receive a block of GLD shares in return.
When the situation reverses and GLD’s market price is below the NAV, Authorized Participants (APs) will buy GLD shares and redeem them for gold from the GLD vaults.
In short: the GLD NAV falls short of GLD’s price, and then arbitrageurs step in and create new GLD shares to make up the difference.
The APs profit by arbitraging the difference between GLD’s NAV related to its share price.
Understanding this mechanism for how GLD shares are created/destroyed is key to seeing the relationship between gold’s price and GLD’s share count.
That’s a little technical of course – and all you really need to know is that money moves into GLD when the price of gold is moving up, and the share count increases. The top in the price of gold tends to coincide with a big surge in the share price.
The market and APs don’t send share counts sky high on a whim… they do so because the price action dictates.
The important takeaway:
We’re nowhere near a GLD peak. Even after a run-up to over $5k/oz, GLD’s sharecount never got close to the peaks we saw in 2011-2012 or 2020.
When we do see GLD’s sharecounts spike, we’ll still have a year or so (or more) before the top finally blows off on gold’s price.
Keep this indicator in mind. As long as we’re nowhere near the tops for GLD’s share counts, we have plenty of runway for this bull market in gold stocks.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio
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