Will The Bitcoin ETF Push Prices Higher, As The Gold-Backed ETF Did?

When the first physical gold exchange-traded-fund (ETF) was launched in the United States in November of 2004, it had a huge impact on the gold market. The SPDR Gold Trust made it faster and easier for investors to get exposure to gold. Exchange-traded funds (ETFs) give traders access to the incremental price movements of physical gold, without having to buy physical gold or futures contracts.

The more investors that want to buy shares of GLD, the more bars of physical gold the fund has to buy. This increased demand helped to propel the price of gold significantly higher in the months and years following its launch. The gold price increased a whopping 70%, from $430 when the fund was launched to $730 roughly 16 months later. The price continued higher and eventually broke $1,000 per ounce for the first time during March of 2008.  The gold price more than doubled in just over three years following the launch of the SPDR gold ETF!

(Click on image to enlarge)

gold etf launch

Sure, gold was already in a bull cycle when the ETF was introduced, but there was a significant acceleration in the price advance in the few years following its launch.

The fund currently holds around $32 billion worth of gold bullion, but it was over $65 billion in 2013. It averages around $800 million per day in volume. The value of all gold-backed ETFs had ballooned to over $150 billion in 2012. Physically-backed gold ETFs as a group are the fourth-largest holder of gold, falling just behind the U.S., Germany and the International Monetary Fund and ahead of Italy and France. The bottom line is that ETFs bring new investors into markets that are otherwise difficult to access. This typically leads to an overall increase in demand and upward price momentum.

Consider that ETFs are still a small percentage of overall gold demand, well behind jewelry and bullion demand. And investors could also get exposure via gold mining stocks, well before the gold ETF was launched. Yet the introduction of the gold-backed ETF was still able to have a significant impact on the market.

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Disclaimer: I am not an investment advisor. This is just my personal opinion. Invest at your own risk.

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Alexander Straub 11 months ago Member's comment

"The more investors that want to buy shares of GLD, the more bars of physical gold the fund has to buy."

I really don't know about any of this. I've always found GLD's holdings to be questionable at best. Just how reliable / accurate are GLD's holding reports? They so famously claim that they are 100% backed but obstinately refuse to give investors access to any of the 'claimed' gold. Why? There are many profitable gold selling businesses in the world. GLD could charge exorbitant fees for delivery of said gold but they don't for some strange reason. It is like saying no to free money.

The frequently referenced GLD subcustodian audit loophole makes me question this fund even more. What guarantees do we have that they have not leased the gold from someone else? i.e. HSBC. How many claims are there on the gold aka hypothecation? GLD's structure seems to be deliberately vague and intentionally flawed. GLD's custodian, HSBC, with their long history of fraud certainly do not inspire confidence either.

For anyone interested but have not heard about CNBC's Bob Pisani's visit to GLD's gold vault, I recommend checking it out. His visit is documented in a segment called Gold Rush: The Mother Lode. This entire segment was organized by GLD's management to prove that their gold actually exists but the gold bar held up by Mr. Pisani displayed a serial of ZJ6752. This serial did not show up on the latest bar list during that time. Cheviot Asset Management’s Ned Naylor-Leyland discovered that this "GLD" bar actually belonged to ETF Securities.