I've noted before that, while GLD frequently inhales gold bullion, it rarely sells; and when it does sell, it’s usually a sign of capitulation.

Why does the GLD rarely sell bullion? Contrary to what you might hear in the media about the gold “trade” being “crowded” -- or about “hot money" -- the truth is that gold is hugely under-owned. In fact, according to the World Gold Council, if global pension funds decided to increase their exposure to gold by just 1.2%, it would require more than 44,000 tonnes -- or roughly 27% of all the gold that's ever come out of the ground.

As for those few investors who've bought the GLD for investment purposes -- such as John Paulson -- they're typically long-term investors, not investors with hot money they're looking to trade with.

We see evidence of this in the fact that the GLD ETF -- one of many ways to buy physical bullion -- rarely sells bullion.


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The ETF does, however, continually add to its holdings as the fund’s number of investors grows, which is part of every bull-market process. Only when gold price corrections reach their scary conclusions do the weaker hands among these hardcore, long-term investors (along with all the short-term traders) typically panic and dump their GLD. This causes the ETF to liquidate bullion through an arbitrage process involving so-called “authorized participants” -- too complicated to go into here.

Meanwhile, each time this panic occurs, more steadfast long-term investors are there to take the GLD off these sellers’ hands.

Because GLD ETF sales of bullion are so rare, when they do occur, they’re normally a signal of sorts -- much like heavy mutual-fund redemptions were thought to be a buy signal in equities back during its secular bull market.