Investors are buying gold on an unprecedented scale this year, as a record amount of gold went to ETF’s in the first half of the year. Worldwide, these funds added a total of 734 tons of gold to their stocks in order to meet demand. Demand was so high that the Bank of England had to come to the rescue once again. Also in the second quarter, the largest gold ETF in the world appealed to the central bank in order to obtain sufficient precious metal.
Earlier this year, we already wrote that since April this year, the GLD fund has been keeping part of its gold stock with the Bank of England. At the end of April, the volume was 45.91 tons. That was about 4.4% of the total gold stock the fund was managing at that time. Since then the situation has not improved. New figures from the US regulator SEC show that in the second quarter the ETF held even more gold through the central bank.
Bank of England
The latest GLD report shows that the fund held even more gold during the second quarter at the Bank of England. The highest level was reached on May 21, when the fund deposited 70 tons of gold with the central bank. By the end of the second quarter that volume had dropped back to about 40 tons. From the report:
“2.3. Custody of Gold
Gold is held by the Custodian on behalf of the Trust, 100% of which is allocated gold in the form of good delivery gold bars which includes gold held with a subcustodian (Bank of England). The greatest amount of gold held by Bank of England during the quarter ended June 30, 2020 was approximately 2,251,607 ounces or 6.3% of the Trust’s gold on May 21, 2020.
At June 30, 2020, Bank of England held approximately 1,283,665 ounces or 3.4% of the Trust’s gold in an allocated account. No gold was held by a subcustodian during the year ended September 30, 2019 or the six months ended March 31, 2020.”
Where is the gold held by GLD?
Normally commercial banks supply the GLD with sufficient gold, but due to high demand there was insufficient precious metal available in the market during the first half of the year. That is why earlier this year, for the first time since 2016, GLD again relied on the Bank of England as a subcustodian. This exceptional situation continued into the second quarter, indicating tightness in the market.
It is very unusual for GLD to structurally hold gold at another custodian than its primary custodian HSBC. This is also reflected in the reporting to the US regulator, analyst Ronan Manly of Bullionstar discovered. In this report we read the following on page 15:
“The Custodian will hold all of the Trust’s gold in its own vault premises except when the gold has been allocated in the vault of a subcustodian, and in such cases the Custodian has agreed that it will use commercially reasonable efforts promptly to transport the gold from the subcustodian’s vault to the Custodian’s vault, at the Custodian’s cost and risk.”
Tightness in the physical gold market?
GLD’s custodian therefore has the task of keeping the ETF’s entire gold stock (1,252 tonnes at the time of writing) in its own vault. The fact that the fund has been holding gold with the Bank of England for two consecutive quarters suggests that there is still not enough gold available through regular channels.
In addition, GLD’s figures in its reporting to the regulator leave room for interpretation. The fund only reports the maximum amount of gold it has held with the Bank of England during the quarter. It is therefore possible that HSBC, as custodian of the fund, has collected gold from the Bank of England in the meantime. This would mean that in total the central bank made much more precious metal available to GLD than the outstanding position of 40 tonnes at the end of the second quarter.
The latter, however, is difficult to determine. Ronan Manly refers in his analysis to GLD’s annual report, which states that the fund is not allowed to inspect the gold stock with a secondary custodian. From the annual report:
“The Trustee has no right to visit the premises of any subcustodian for the purposes of examining the Trust’s gold or any records maintained by the subcustodian, and no subcustodian is obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian.”
Based on this information we can draw a number of conclusions. The first is that there are still strong indications of tightness in the physical gold market. We can also conclude that as an investor in an ETF such as GLD you cannot check whether all the gold is actually there. Thirdly, we can conclude that the Bank of England can apparently get gold somewhere to make available to GLD. Who owns the gold that the central bank has been lending since April?
Investing in gold via exchange traded funds (ETFs) is attractive because of its convenience and relatively low custody costs. The downside is that you do not own any physical gold and usually cannot withdraw physical gold. Also, the precious metal you think you have is usually not fully allocated to the client. The preferred alternative is to buy gold yourself and store it with a professional custodian. This way you know exactly what you have.