Massive run into gold temporarily disrupts BlackRocks ETF

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Blanchard and Company has long touted the advantages of physical gold ownership over substitutes such as gold-linked ETFs, mining stocks, and futures contracts.

And with gold hitting 13-month highs Friday despite a superficially strong February jobs report, interest in the yellow metal is growing by leaps and bounds. However, investors shouldnt mistake high-profile surrogates such as gold ETFs for the real deal.

For more evidence on why physical bullion is the way to go, look no further than the behemoth investment firm BlackRock, which was forced Friday to suspend fresh inflows into its roughly $8 billion flagship gold ETF, the iShares Gold Trust (IAU). [Note: BlackRock announced Monday that it had resumed issuing shares but could face penalties for some premature issuances.]

Fund caught off guard by demand: Why the suspension? Surging interest in the precious metal caught the worlds largest money manager off guard, Bloomberg reported. Investors had piled into the fund so fast that BlackRock didnt register in time with the U.S. Securities and Exchange Commission to issue more shares.

BlackRock on Friday issued a formal statement on the matter, noting, Since the start of 2016, in response to global macroeconomic conditions, demand for gold and for IAU has surged among global investors. IAU has $8 billion in assets under management, and has expanded $1.4 billion year to date. February marked its largest creation activity in the last decade. This surge in demand has led to the temporary exhaustion of IAU shares currently registered under [securities law].

Potential for super spike: For those looking to buy gold via these mechanisms, the statement isnt very reassuring. Moreover, the suspension of new share sales raised concerns that perhaps the supply of available physical metal has been outstripped by this surging demand. More than $5 billion worth of investment capital has flowed into the largest ETF, the GLD, in the first two months of 2016 alone. And according to Bank of America Merrill Lynch, gold funds attracted inflows for the fourth week in a row, bringing the four-week total up to $7.9 billion, the largest in seven years.

This run into gold is one reason why the ratio of physical gold to so-called paper gold, as represented by investment-product shares, is at all-time highs. The ratio has spiked significantly, and Im starting to get reports from around the world (from) different correspondents and they say you cant get gold, not in size, author and strategist Jim Rickards told RT. We may be heading for a train wreck there where someone is going to fail to deliver some physical (bullion) that someone demands and then that could set off a super spike in gold prices.

Negative rates terrifically bullish for gold: Why the massive interest in gold now from people who werent giving it a second thought back in 2015? Answer: The increasing talk of central banks imposing negative interest rates and an accompanying ban on physical cash to facilitate those rates.

Why negative rates? The push for negative interest rates and a ban on cash has nothing to do with terrorists or money laundering, The Epoch Times argued. It has everything to do with bailing out the banks and trying to remedy central bank policy that didnt work in the past.

With little to no return on bank deposits, money-market funds, and run-of-the-mill bonds, investors are increasing seeking alternatives such as gold.

This is a terrifically bullish moment for gold, commented James Grant, publisher of Grants Interest Rate Observer. Its a very sad moment for the institution of fiat money. But fiat money has never worked out well in the very long run.

Negative rates drive up hard-asset values: Under a negative-rate regime, people may even prefer to own heavy pieces of machinery, art, diamonds, and musical instruments, which preserve purchasing power relatively better than a negative rate on banking deposits, The Epoch Times added. People usually chose those methods to preserve purchasing power during times of hyperinflation, like in the Weimar Republic.

And while stocks and real estate will certainly get a boost, most studies show that real, inflation-adjusted returns are often negative because wrong incentives distort the pricing mechanism. Capital is misallocated, and transactions slow down if people are trading goods and services in gold ingots rather than wire transfers.

Cash hoarding sweeps Europe: Already were seeing the war on cash gain steam, with the German newspaper Der Spiegel reporting this week that the Bavarian Banking Association has recommended that its member institutions start hoarding physical currency. And Germanys Social Democrat party has recently proposed setting an upper limit on cash transactions, to 5,000 euros, while also abolishing the 500-euro note. Meanwhile, Sweden has set a five-year timeline to carry out its own cash elimination.

With moves like these, its no wonder than investors are piling into gold funds. Only, gold ETFs, being just paper and electronic representations of bullion, are in fact fools gold. Theyre not the real thing, just poor substitutes. When push comes to shove, nothing beats actual physical gold at your fingertips when you need it in a crisis.