Gold Demand Trips Up BlackRock as ETF Halts Share Creation

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  • iShares Gold Trust temporarily halts issuing new shares
  • As demand surged, BlackRock was slow to register new shares

BlackRock Inc. on Friday temporarily stopped issuing new shares in its $7.7 billion iShares Gold Trust, as surging interest in the precious metal caught the world’s largest money manager off guard.

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.

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.”

No Typical ETF

BlackRock’s gold fund isn’t a typical ETF. It is registered as an exchange-traded commodity, and regulations require that the firm make a filing when it wants to create new shares in excess of those already registered. BlackRock was forced to suspend issuance of new shares because it had exhausted the amount of shares registered, and didn’t register more shares fast enough.

Regular ETFs, by contrast, can create shares continuously and aren’t required to register them as the fund grows.

The iShares Gold Trust, which was started in 2005, created more shares in February than at any time in the last decade, according to BlackRock. The fund has expanded by $1.4 billion so far this year, according to the company.

“This isn’t actually that uncommon an occurrence in commodities products,” said Dave Nadig, director of ETFs at FactSet Research Systems. “Generally the market realizes more shares will be available in a day or two and so no significant premium develops.” 

‘Operational Hiccup’

“I’d say it was just an operational hiccup,” Nadig said.

Investors have piled into gold, making the precious metal the best performing major asset this year, amid mounting concerns slowing global growth may hurt the U.S. economy and prompt the Federal Reserve to delay interest increases this year. The precious metal thrives in a low interest rate environment because it doesn’t offer investors yield or dividends. Bullion is also a haven in times of turmoil. 

Russ Koesterich, global chief investment strategist at BlackRock, said Friday that investors should consider buying gold on the expectation of more volatility in the market this year. Gold does a good job of moving in the opposite direction when volatility spikes, he said on Bloomberg Radio.

Investors raised holdings in gold-backed ETFs by 259 metric tons so far this quarter, which would be the biggest quarterly gain since June 2010. Holdings are rising after three straight years of withdrawals.

Bullish Positions

Open interest, a tally of outstanding contracts in Comex futures, rose to the highest since 2012. That suggests investors increased bullish positions and prices may rise, said Tai Wong, director of commodity products trading at BMO Capital Markets Corp. in New York.

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.”