A gold exchange-traded fund (IAU) that is issued by BlackRock has been suspended due to increased demand.
BlackRock recently issued a statement that it would not issue any new shares for its gold ETF until new shares are registered. Existing shares can continue to be traded in the open market.
In order to issue new shares, they first have to be registered with the SEC. So as they await approval, new shares are on hold.
IAU holds gold as a physical asset. Although it is referred to as an ETF, it technically gets classified as an exchange-traded commodity (ETC) and is therefore subject to different rules.
According to BlackRock’s statement, the fund has $8 billion in assets and has expanded $1.4 billion year to date.
There is obviously a surge in demand for gold and gold-related investments, which is why the fund is registering new shares.
Gold bulls often talk about demand in the paper market versus demand for the actual physical metal. But in the case of a gold fund (not to be confused with a mutual fund consisting of mining stocks), there actually has to be a certain amount of gold stored in the vaults to represent the existing shares.
Now, there is always a question of whether the shares are fully backed by gold. These funds are audited (unlike the Federal Reserve and its gold holdings), but you never know for sure when you are holding redemption shares.
This is why some gold bulls favor holding actual physical gold. Unless you can touch it and control it yourself, you don’t have a 100% guarantee that it is there.
Still, if you are big investor, how much physical gold are you really going to own? It isn’t necessarily wise to hold hundreds of thousands of dollars worth of gold buried in your backyard, just as it probably isn’t wise to hold hundreds of thousands of dollars in cash under your mattress.
With a gold fund, you get the benefit of having it stored for you. You also have the benefit of low transaction costs and a high degree of liquidity. You can sell your gold shares in the matter of seconds, just as you would trade a stock. And if you have to sell gold coins quickly, good luck taking it to a local dealer and getting a good price near the spot price.
The Paper Market will Catch up with the Physical Market
There can be a disconnect between the paper market for gold and the actual physical metal. Still, despite regulations and central bank buying and selling of gold, the disconnect won’t be too big or last too long. We still have something of a free market.
If there are enough buyers at a certain price, the price of gold will go up regardless of what short sellers are doing, or even what central bankers are doing.
While the central bank of Canada has sold off most of its gold holdings, it appears the Chinese continue on as buyers, despite rough economic times.
And despite tariffs on gold imports in India, the Indian people will continue to favor gold and find ways to buy it.
Gold has obviously done well so far in 2016 after several years of a down market. With falling stocks and negative interest rates, some investors are finding it is better to buy and hold gold if they want some form of safety.
The interesting question is whether increased demand could eventually set off some form of panic buying. Since most of the traded gold happens in the paper market where gold doesn’t actually exchange hands, we have to wonder what would happen if people start demanding delivery from their paper contracts.
The more likely scenario is just a simple pickup in demand for the physical metal. If someone owns futures or options contracts in gold, they don’t really have to demand delivery if they want to own physical gold. They can redeem their profits from their contracts and then use the money to buy from gold dealers.
Either way, it achieves the same result. And if more people start buying physical gold, then it will quickly show up in the price. Premiums for coins and bars may increase as well.
As we have seen with the BlackRock statement, its fund is having to buy additional physical gold on behalf of its customers buying its gold fund.
The market will always clear at some price. You can always buy gold, whether in physical form or via the paper market. The question is what price will you pay.
Gold may or may not continue to go up from here. But at this point, the upside looks to be far greater than the downside.