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Gold/Mining/Energy : Gold & Gold Stock Analysis
GLD 414.48+0.7%Jan 9 4:00 PM EST
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To: aknahow who wrote (4672)12/13/2006 6:47:27 PM
From: The Vet  Read Replies (2) of 29622
 
Because the spot market is not fully transparent we can't see exactly what is happening on the physical side of the gold market but we can see the footprints of the big traders in the stock market patterns for GLD which we can see tick by tick.

In a predominately bull market for gold I would expect that redemptions would be small and infrequent but that could change if there was a collapse in the POG. My guess is that once the GLD price got lower than the spot metal, the authorised participants would start selling metal short and buying shares until they had gathered together a full parcel of shares for redemption to cover the metal short.

This would be a fairly safe trade because if the market turned during the process they can buy back the short position in physical metal (maybe at a small loss) but they would more than make it up in profit on the GLD stock.

The interesting thing about this is that for the big players who are authorised participants, their own actions (equal and opposite) in each market (spot and GLD stock) is a natural no cost hedge. To clarify, I mean that when they are buying GLD stock they are selling spot gold and when they are selling GLD they are buying metal and making a small but almost riskless profit in both cases. Effectively the share trading public pays this profit through the spread on GLD shares, but it's a very small price for the convenience and far less than the spreads and charges on the spot market.
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