Dissecting Gold’s Worst Plunge In 100 Years

ETF.com

 

[This article previously appeared on HardAssetsInvestor.com and is republished here with permission.]

 

The second quarter of 2013 saw the worst performance for gold in close to 100 years as prices plummeted by 23 percent. The fear in the market at the time was palpable. But what exactly was going on in the market at the time? The latest Demand Trends Report released today from the World Gold Council sheds some light on one of the most volatile periods in the yellow metal’s history.

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Overall Gold Demand Changes

According to the WGC, overall gold demand fell by 118.3 metric tons, or 12 percent, from a year ago, in the second quarter. But the drop was by no means across the board. In fact, there was a stark contrast in the performance of the various gold demand categories.

Jewelry demand, for example, was up by 154.7 metric tons, or 37 percent, while bar and coin investment demand (what some call “physical investment demand”) jumped by 221.7 metric tons, or a whopping 78 percent.

As we wrote earlier this week (see Selling By Western Investors Can’t Hold Down Gold Prices For Long As Asian Demand Surges ), physical investment in gold is dominated by two countries—China and India. The Asian duo accounts for roughly half of global gold demand.

In an interview to published on HardAssetsInvestor later this week, Marcus Grubb, managing director of investments at the WGC, told us that both China and India may see their demand rise to 1,000 metric tons each this year. That would be a record for China and a near-record for India.

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Gold Demand

 

But while the physical side of the gold market was doing well, on the flip side, demand from exchange-traded funds dropped an enormous 402.2 metric tons, and explains the decline in overall demand and prices in the quarter. Western investors—the primary holders of gold ETFs—anticipating better economic conditions and an end to ultra-loose monetary policies by central banks, sold aggressively.

A recent filing with the Securities and Exchange Commission showed that billionaire investor John Paulson cut his holdings in gold ETFs by half in the second quarter, from 21.8 million shares in the SPDR Gold Trust (NYSE Arca:GLD) to 10.2 million.

Representatives for Paulson’s firm told Bloomberg that the reduction was “due to a reduced need for hedging.”

Meanwhile, fellow billionaire George Soros completely sold out of his GLD stake, liquidating his remaining 530,900 shares in the quarter.

The other disappointing segment of gold demand was purchases by central banks. Those fell by 93.4 metric tons, or 57 percent, year-over-year. Still, while purchases may have declined—likely due to the volatility in prices during the quarter—central banks remain net buyers for now. As a group, they became net buyers in 2010 after 20-straight years of selling.

Central Bank Purchases Since Q2’10

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CB Purchases Since Q2 2010

Finally, the WGC said that gold supply fell by 62.4 metric tons, or 6 percent, in the second quarter. That was due to a 21 percent drop in recycled gold supply, which offset a 4 percent increase in mine production. Recycled gold supply tends to correlate with gold prices. The WGC said that “a 10 percent decline in price corresponds with a 14 percent decline in the value of recycled gold…”

Many expect that lower gold prices will crimp mine production going forward, but even if that’s the case, it will take time to filter through the market.

Gold Supply Since Q2’10

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Gold Supply Since Q2 2010




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