Only five years old, the GLD ETF became the easiest way for investors and funds to own gold.  Just push a button and voila, you own some real gold, not just shares in a mining company that are only a future claim on the yellow metal.  Compare this to the traditional way, purchasing physical gold or taking delivery from the COMEX futures market and you will immediately realize the value the GLD ETF has created for the gold bull market.  In an article by Adam Hamilton posted at the Market Oracle that discusses these trends, we find

Today GLD is the second largest ETF on the planet, behind only SPY which tracks the flagship S&P 500 stock index.  GLD now holds a staggering 1117 metric tons of physical gold bullion in trust for its shareholders, which was worth $41.3b this week!  This “people’s central bank” fueled by stock-trader gold demand has amassed so much bullion it now boasts the world’s sixth-largest holdings.

Today GLD holds more gold bullion than the individual central banks of China, Switzerland, Japan, Russia, Europe, and India!  Overcoming some controversy after its introduction, GLD has matured into the juggernaut of the gold world.  Through their collective buying and selling of GLD shares, stock traders now have far more influence over daily gold price action than the world’s central banks.

With this still-growing ETF already a force to be reckoned with, no investor or speculator in the precious-metals realm can afford to ignore it.  GLD’s impact is broad and expanding, and its trading activity alone can drive the global gold price at times.  And where gold goes, silver and the PM stocks inevitably follow.  Thus PM traders who fail to stay abreast of GLD’s activity will never fully understand PM price trends.

Why is this important?  Because when you have a limited supply of something that is hard to buy (gold), and make it easy to buy, you expand the market for it and the price has to go up because the supply stayed the same.  Economics 101.

These barriers to entry for widespread gold ownership were considerable, as the great majority of stock traders weren’t willing to put in the effort in past bulls.  But today, thanks to GLD stock traders can instantly gain gold exposure, at a trivial cost, with a click of the mouse.  This has led both institutional and individual stock investors and speculators to funnel capital into gold like never before in history.

And now that our friends the hedge fund can make gold into a momentum investing play, something impossible to do with futures and physical delievery.  Add to that the price run up because of India's purchase of 200 tonnes of gold (reported at Before It's News) so there is now effectively a floor on the price of gold since there are now large central bank buyers of gold who will take whatever they can get.  Combine that with a U.S. Treasury, Federal Reserve and administration intent on destroying the dollar by keeping interest rates too low to appease the homeowners with $500 billion of Option ARM resets coming due and who would face certain foreclosure if rates went above 5 percent and you've got a roaring gold market.  So what is happening to GLD right now?

Provocatively, the biggest spikes in GLD holdings tend to occur early in major gold uplegs.  When gold first starts moving higher again after consolidating sideways, stock traders tend to flood into GLD at a faster rate than gold is being bought which forces its custodians to issue more shares to buy more bullion.  But by the time a gold upleg matures to its fast-rallying climax stage, gold demand catches up with GLD demand so this ETF’s holdings remain stable.

It is also fascinating that significant GLD bullion selling is relatively rare.  While there often is some differential GLD-share selling pressure when gold is weak, it is fairly moderate as evidenced by the shallow and infrequent dips in GLD’s holdings.  This is really impressive to me, as it shows that the stock investors buying GLD are relatively strong hands.  Many are in for the long term and don’t get too frightened by periodic gold weakness.

True, but people who live by things that go up, also find that those things return to earth, too.

If there was ever a time when all the relatively new stock traders owning GLD ought to have been terrified, 2008 was it.  Between the end of that massive early-2008 commodities upleg, the summer bond panic, and the autumn stock panic, the selling pressure in gold was extreme.  Heavy differential GLD selling pressure would have wildly increased gold’s downside, but GLD’s holdings remained surprisingly resilient.

In the 6 weeks between mid-March 2008 (a Fed surprise) and early May, gold fell 15.3%.  Meanwhile GLD’s holdings fell by 12.6%, which was certainly significant but it didn’t amplify and feed on gold’s weakness anywhere near as much as feared.  Between July and September 2008 during the bond panic (which drove major US dollar buying), gold plunged 23.8%.  But GLD shareholders weathered this fear pretty well, only driving another 12.5% decline in GLD’s gold-bullion holdings.

And then from early October to mid-November in the heart of the stock panic, gold plummeted 22.4% in under 5 weeks!  This was the perfect recipe for massive differential GLD selling pressure, as gold ought to have soared during a global financial panic instead of getting sucked into it.  Yet despite the extreme fears bleeding over into gold, GLD’s holdings only shrunk by a trivial 2.2% over this span.

And within this entire troubled period from March 2008 when gold first closed over $1000 to those November panic lows, this metal had fallen 29.3%.  This was a serious and very disconcerting selloff, even for the hardest-core gold faithful.  But over this undeniably miserable 8-month span for gold, GLD’s holdings actually grew by 12.8%!  The stickiness of its holdings, even amidst the most challenging conditions of this entire gold bull, was remarkable.

Once you get the momentum playing hedge funds involved, you are in for a major move up.  While there might be some ticks down, the Fed has succeeded in cranking up the printing presses to generate inflation, at least that indexed by gold, which is now up 55% from the day of President Obama's election ($750-$1163).