POSTED BY July 26, 2011 12:57 pm COMMENTS (2)ON
As AP(Authorised Participant) buys physical Gold the price of Gold will increase. Similarly as he sells fresh ETF units in the market, the supply of ETFs will increase.
These two actions will lead to increase in Gold prices and reduction in ETF prices, thereby removing the anomaly in the prices of the ETF units and the underlying.
Similarly, if ETF prices fall way below the price of Gold, APs will buy ETF units cheap and redeem them in Creation Unit lot size. Such an action will reduce supply of ETFs from the market and increase the supply of physical Gold (Gold held with Custodian will come into the market). Both these actions will help align prices of underlying and ETF units as ETF prices will increase due to
buying (and subsequent cutting of supply) and price of physical Gold will reduce due to fresh supply in the market.
I couldnt understadn the second paragraph, why can there be any anamoly when gold ETF prices are aligned with Gold … and why AP’s should come into picture?