Exchange-traded products tied to physical precious metals have continued to get battered in recent trading. This is also especially true of ETFs that track companies in the mining sector. While the latter case makes sense—as mining stocks lose value, so do the funds tracking them—it’s increasingly worrisome what’s going on with gold and silver ETFs.
Gold vs. Silver
The leading gold-backed ETF and its silver counterpart have actually charted opposite paths over the last week. This strange divergence may merely reflect the precious metals bulls moving their money from one metal to the other as an alternative. In other words, with less interest in gold at the moment, silver is the most logical alternative for those interested in precious metals.
For the fifth consecutive week, the SPDR Gold Trust (NYSE:GLD) saw net outflows of investor money, indicating a weakening market outlook for gold prices in the near-term. Even though GLD is still by far the largest gold ETF, its stockpile of bullion has now fallen to its lowest levels since the onset of the financial crisis in 2008. This brings the fund’s total assets under management (sometimes abbreviated AMU) to just 660 tonnes of gold.
Silver ETFs did not necessarily follow gold lower, however. This occasionally happens in the physical bullion markets as well, and is usually due to silver prices being pulled in the opposite direction of gold due to changes in the levels of industrial demand for silver. (This influence from heavy industry is a trait that gold does not share with silver and the Platinum Group Metals in any significant way.) The largest silver-backed ETF, the iShares Silver Trust (NYSE:SLV), actually saw its inventories of silver bullion increase to 9,897 tonnes—a fresh 9-week high.
According to the inflow and outflow data from GLD and SLV, some analysts are predicting that the biggest waves of selling pressure could come if the gold price dips below $1,000 per ounce. This makes sense considering that the strongest periods of buying were seen while prices were rising from $900/oz to $1,000/oz several years ago.
Same Story Across Exchanges
One of the running themes in the precious metal ETF market is that it really tracks the movement in the paper markets (COMEX futures) for gold and silver. The reason this is of note is because futures trading for precious metals is increasingly unrelated to actual demand for physical precious metals. Although this dynamic seems odd in light of the fact that the main ETFs are capitalized by actual stockpiles of physical bullion, it’s the underlying moment-to-moment value of those holdings that many investors are concerned with (rather than the intrinsic usefulness of precious metals as assets).
The alarming point here is that the amount of leverage in the various metals exchanges has hit unprecedented levels. There are more and more “shares” or claims of ownership for each ounce of gold currently held in the official vaults of various exchanges (like COMEX in the United States and the LBMA in the United Kingdom).
For instance, the gold futures trade on the COMEX has become so over-leveraged that there are at least 300 times as many shares of gold on the market for each physical ounce of the metal. The potentially disastrous implications of this development are obvious: there’s not enough gold to go around if even a small percentage of shareholders chose to take delivery of their precious metals at once.
The situation is even worse for the London Metals Exchange (LME), administered by the London Bullion Market Association (LBMA). This is the world’s largest trading platform for gold, where 200 million ounces of “paper gold” changes hands on any given trading day. The only problem is that, when ETF holdings are accounted for, the various vaults in London could only cover 1/1000th (0.1%) of those quantities of gold if indeed anyone demanded delivery of their actual metal.
Though some amount of leveraging has always been the case in the paper markets for gold and silver, the accelerating pace is a bit like a powder keg just waiting to explode.