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Gold/Mining/Energy : Gold & Gold Stock Analysis -- Ignore unavailable to you. Want to Upgrade?

To: jimsioi who wrote (12148)	2/23/2008 4:42:17 PM
From: The Vet	Read Replies (3) \| Respond to of 29622

The way GLD is designed to work is like this (simplified).. The price of GLD is kept in line with the price of gold by the "authorized participants" who sell shares from their inventory to the public on the stock market and then replenish their inventory of stock by delivering actual gold (metal) in "parcels lots" to GLD's account at their custodians vaults. In return GLD issues the equivalent number of shares to the AP to replenish his inventory of shares to sell. While the demand for GLD stock exceeds the supply of stock for sale the tendency is for the price of GLD stock to be above the fair value of the gold each share represents. As the price of GLD shares go up and the AP makes his profit by arbitraging the difference between the spot price of gold and the value of GLD shares. If the demand for GLD drops the price of GLD also will drop to less than fair value when compared to the spot metal price, so the AP buys back the stock from the market and delivers it in parcels to GLD and in return gets back from the custodian the equivalent parcel of actual metal which he sells on the spot market. So the AP automatically maintains the GLD price within a narrow price band above and below the actual spot POG by buying and selling GLD stock and depositing or redeeming the appropriate amount of actual gold via GLD's custodian. However, the premium/discount of GLD stock to the POG needs to be sufficient to allow the AP to make his profit on the transaction and to cover his operating costs. The AP only steps into the market when he sees that there is a profit for him to do so, even though that profit is quite small percentage wise. What I think is happening now is that short sellers of GLD stock have moved in. They are not APs and they are selling gold short simply to gain cash in their accounts. They do not attampt to balance their books like the APs by delivering gold to GLD's custodian; they just sell short and thus increase the GLD trading float without affecting the gold in storage or the number of issued shares. Legal short sellers borrow stock and sell the borrowed stock thus doubling the trading float without any newly issued shares being produced and without any gold added to the vaults. Naked short sellers don't even bother to borrow the stock they sell. While, in theory these shorts will have to cover at some time, there is no compulsion for them to do so and for large players like banks, brokerages and some large funds, these short positions remain as paper liabilities for years while the cash from the sale is delivered into their accounts within the 3 days settlement time. These shorts are not necessarily making a statement about their view on the future price of gold. They need liquidity; they need cash; and GLD is a stock where the price is not diminished by the volume of sell orders but by the POG which the short sellers of GLD stock are not affecting. Because the short sellers can price their sell orders inside the spread that the AP's can operate profitably within, they get virtually all the sales and the AP's cannot sell stock and build up the GLD deposit of metal while the shorts effectively soak up all the buy orders. Net result, is that while the short positions remain (and there is nothing to make the shorts cover at any time) each GLD share is being diluted by the short sellers and is no longer covered in full by the quantity of metal in GLD's custodian account. Last reported admitted short position in GLD was around 8 million GLD shares sold short or approx 24 tons of gold equivalent (as GLD shares) as at the second week of February. That's $744 million cash in the short sellers pockets as a zero interest, non expiring loan. That doesn't include naked positions and many other short sales don't get reported in the "official report" so that is probably a low figure. It is probably much higher now. shortsqueeze.com