Gold ETF Suspends Issuing Shares Due To “Surge” In Demand

Gold ETF, the iShares Gold Trust, had to stop issuing new shares in its $7.7 billion on Friday as a “surge” in investment demand for gold caught out the provider of the ETF and the world’s largest money manager, BlackRock Inc.

According to a statement from the company

“Since the start of 2016, in response to global macroeconomic conditions, demand for gold and for IAU has surged among global investors,” causing the ETF to expand its assets under management by $1.4 billion this year alone.

“This surge in demand has led to the temporary exhaustion of IAU shares currently registered under [law]. We are registering new shares to accommodate future creations in the primary market by filing a Form 8-K to announce the resumption of the offering of new shares,” according to the statement. “The ability of authorized participants to redeem shares of IAU is not affected.”

Bloomberg further elaborated:

Investors had piled into the fund so fast that BlackRock didn’t register in time with the U.S. Securities and Exchange Commission to issue more shares. The suspension means that the share price of the fund may deviate from the price of its underlying assets — the physical gold — until issuance resumes, probably within two or three business days, according to a person familiar with the matter.

The misstep by New York-based BlackRock comes as providers of exchange-trade funds face mounting concern that the products may pose risks that investors aren’t always aware of. Cracks in the system were revealed on Aug. 24, when many equities didn’t open for trading, yet the ETFs that hold them did, causing confusion among investors about their value.

“One would suppose this would be something they would be monitoring more carefully,” said Ben Johnson, director of global ETF research for Morningstar Inc.

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ETFs hold a basket of assets that are rolled up into a single security that can be traded on an exchange. The ETF market has exploded in size, jumping 2 1/2 times in value since the end of 2009. Kara Stein, a U.S. Securities and Exchange Commissioner, last month expressed concern that the ETF market has become too difficult for retail investors to understand.

“I fear that the risk presented by some of these new products may not be fully understood by those who have invested in them,” Stein said at a conference in Washington, speaking generally about new ETFs. “Indeed, even plain-vanilla, equity index ETFs may present risks that are not always anticipated or fully understood, as evidenced by the events of Aug. 24.”

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BlackRock said that, even without new share issuance, market makers have a range of tools to meet investor demand, including using existing inventory.
“This suspension does not affect the ability of retail and institutional investors to trade on stock exchanges,” BlackRock said. “Retail and institutional investors will continue to be able to buy and sell shares.”

Gold ETFs have many unappreciated risks as we outlined from their inception. Risks from these created financial instruments include valuations, annual fees and expenses, counter-party risks as well as liabilities and responsibilities of the market participants such as the auditors and custodians.

Gold bullion is unique among asset classes as it is an asset class not dependent on the performance of auditors, management, corporations, financial institutions, banks, politicians and governments. Nor is physical gold dependent on the performance of trustees, custodians and or sub custodians.

Gold ETFs are fine for those wishing to take a speculative position long or short the gold market. However, for the majority of of investors and pensions they are likely not suitable. They should not be confused with owning physical gold coins or bars in allocated and segregated accounts. ETFs are quite high risk financial products while gold bullion is a proven hedging instrument and safe haven asset.