BlackRock Inc. (NYSE: BLK) on Friday said it has suspended the issuance of new shares in the roughly $8 billion iShares Gold Trust (NYSEARCA:IAU), citing a surge in demand for gold. For this year, this ETF product raised almost 20% as the turbulence in the market forcing investors go for much safer product like gold.
Existing shares of the gold trust will continue to trade despite the suspension of new share creation, the asset manager said in a news release. But the suspension could mean that the price of the fund will rise faster than the price of gold until share creation resumes, reflecting the premium that will likely accrue to existing shares, analysts said. The changing prices of ETFs will more basically based on the mechanism that those APs are arbitraging on the underlying stocks or other financial products that the ETF has to track. However, tracking errors will occur if those arbitrage activities got suspended. The suspension here will from BlackRock will interrupt the process that allows exchange-traded products to reflect the value of their underlying holdings, the creation-and-redemption of shares, essentially allowing investors to arbitrage away any difference between the two values.
This could drive investors toward competitors’ products, said Mohit Bajaj, director of ETF trading at WallachBeth Capital LLC. The investors are “going to be paying more of a markup,” said Mr. Bajaj, whose team trades the BlackRock gold product. “Our pricing is going to be much higher on the offer.”
“I think people are going to be trading GLD instead of IAU now,” he said, referring to the SPDR Gold Trust, a $32 billion competitor run by State Street Corp.
Demand for gold ETFs has surged in recent weeks amid concerns that the global economy is slowing down and the adoption of negative interest rates in Japan—a move that has intensified scrutiny of financial-industry profitability.