Gold ETF Price Gaps and Physical Delivery Bottlenecks

Summary

The document discusses why gold funds such as GLD, IAU, and PHYS can show different short-term returns even when they are all linked to gold. The response emphasizes that market prices can diverge from underlying value when financial or physical constraints impede arbitrage or delivery. In the cited episode, gold availability was uneven across locations and bar formats, with uncertainty about moving large London bars to New York and recasting them into smaller bars.

This explanation connects logistics and financing frictions to a gap between physical gold and futures prices, helping explain why a physically backed fund need not immediately capture a local premium. The evidence is a brief market observation and a cited news report from March 2020, not a quantitative comparison or a general test of fund tracking. The cause described is situational and should not be assumed to explain every performance difference between gold products.

Key ideas

• Financial and physical constraints can cause gold prices and fund returns to diverge.
• Gold that exists in one location or bar format may not be readily deliverable where demand is concentrated.
• Delivery and conversion frictions can disrupt arbitrage between physical gold and futures.
• The explanation is tied to a specific market episode and does not quantify the funds’ tracking differences.

Tags

# Different performance between GLD, IAU and PHYS


# Different performance between GLD, IAU and PHYS












At this very moment (about 10:15, 2020/3/24), GLD/IAU are up about 4.5% and PHYS about 3.5%

What causes such differences? Gold bars are in short supply around the world (https://www.ft.com/content/81d915e2-6cef-11ea-89df-41bea055720b) and I saw in the news that the efp between physical gold and futures exploded. But shouldn't that create premium physical gold, such as PHYS, rather than GLD?

## Answer by kdragger (score 1, accepted)

https://quant.stackexchange.com/a/51809

The value (or time value) of something is not the only determinant of price. Occasionally, financial and/or physical restrictions can get in the way. For instance, it may be hard to get a loan (even a collateralized loan) when the world feels very uncertain. In this case, there is sufficient gold but in the wrong place. There is an uncertainty about whether one can get gold from London in 400oz bars to NY into 100oz bars.

See Gold supply fears push spot prices far below U.S. futures, Peter Hobson, Reuters, March 24 2020.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.