U.S. Markets closed

Could Gold ETF Outflows Drive ‘Vicious Circle of Selling?’


The largest gold ETF backed by physical bullion saw its largest one-day outflow in 18 months on Wednesday and fell 2.5% on speculation the Federal Reserve may ease back on economic stimulus.

Bullion holdings in SPDR Gold Trust (GLD) fell by 20.8 metric tons on Wednesday, the biggest one-day outflow since August 2011, Reuters reports.

The ETF currently holds about 1,299 metric tons of gold valued at $66.3 billion. In terms of performance, the gold fund is down about 7% the past month.

“What people are concerned about is that the physical ETFs are a major threat in a way, in that if people become convinced that the bull run is unwinding, you may start to see (those inflows) moving in the opposite direction,” Standard Chartered analyst Daniel Smith said in the Reuters story.

“That can create a vicious circle of selling, and lower prices, and selling. People are watching that very closely,” he added. [Could Gold ETFs Worsen a Price Decline?]

However, Nicholas Brooks, head of research and investment strategy at ETF Securities, in a 2012 interview downplayed the impact of ETFs on the overall gold market, calling their effect “minimal.” For example, net inflows to gold ETFs in the first half of 2012 accounted for less than 4% of total demand for the precious metal.

“Demand for jewelry, coins and gold bars is dominant, while China and India are a big part of the market,” Brooks said in a telephone interview. “Gold ETFs are in the headlines for a good reason, and they’re an easy way to access the gold market. However, they’re a small portion of the overall gold market.”

ETF Securities manages ETFS Physical Swiss Gold Shares (SGOL).

Gold has been under attack in recent sessions with futures surrendering the $1,600-an-ounce mark. [Gold Miner ETFs Lowest Since Sept 2009 After Fed Minutes]

The precious metal on Wednesday dropped to its lowest price since July. Technical analysts are also talking about the so-called death cross in gold, with the 50-day moving average crossing below the 200-day average.

“It’s clear the funds are not coming in to support the market, and I don’t see any physical interest either. There has been a clear rotation out of gold and other commodities into equities,” said Bill O’Neill, partner of commodities investment firm LOGIC Advisors, in a separate Reuters report.

SPDR Gold Trust


Full disclosure: Tom Lydon’s clients own GLD.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.