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Gold And GLD Are Falling Out Of Bed

Olly Ludwig


Gold prices have slipped 27 percent so far this year and assets in the bullion fund SPDR Gold Shares (GLD) have fallen by almost half—suggesting the 12-year gold rally may be over and the stage may be set for smoother growth ahead if the mania to own gold that accompanied the worst downturn since the Great Depression has run its course.

There are plenty of strands to this story, the most crucial of which seems to be that the inflationary pressure so many thought would accompany the Federal Reserve’s unprecedented easy-money policies of zero interest rates and “quantitative easing” has yet to materialize, essentially undercutting one of the main reasons investors own gold.

GLD, the world's biggest physical gold ETF, has suffered outflows of $18 billion this year, the latest of which was $667 million worth of redemptions on Tuesday, June 25 , according to data compiled by IndexUniverse. The huge fund now has just under $40 billion after starting the year with more than $72 billion, an asset drop of 45 percent that's accelerating.

Gold prices are now at $1,222 a troy ounce, the lowest they’ve been since August 2010, and well off the cycle high of $1,921 in September 2011 that followed rancorous debates in Washington, D.C., over the “debt ceiling”; Standard ' Poor’s surprise downgrade of U.S. sovereign debt; and the unsettling spectacle of a debt-gorged eurozone in policy chaos.

Gold prices drifted sideways for some time after that upsetting period, but actually began to decouple from the Fed’s “inflationary” policies in the fall of 2012, when the U.S. central bank launched so-called QE3—the $85 billion a month bond-buying program designed to keep borrowing rates low in an economy still scarred by the meltdown of 2008-2009.

“In the end, gold is a hedge against inflation, and QE hasn’t resulted in any inflation,” said Sumit Roy, a commodities analyst and managing editor of HardAssetsInvestor.com (HAI). Roy stressed that the lack of increased inflationary pressure in the wake of QE3, more than after the first two legs of bond buying, really caught the attention of the gold market.

It’s been a more or less steady move downward in price and assets since then, though GLD—said to be held more by traders than other gold ETFs—has borne the brunt of the shift in investor sentiment. This year, GLD has lost 28 percent of its holdings in troy ounces, while all other gold ETFs have lost 12 percent. GLD makes up half of all the gold in ETFs.

GLD ETF Holdings in Troy Oz YTD

GLD's holdings have dropped 28 percent this year to 31 million troy ounces from 43 million.


Healing Wounds

The other piece of the macroeconomic tale that’s crucial to grasp is the European Central Bank’s decision in July 2012 to finally declare that, like the Fed in the United States, it was prepared to take on the role of lender of last resort should any eurozone countries truly be brought to the brink, taking a Lehman Brothers-like failure off the table in Europe.

That pretty much put a lid on the angst-driven rush to gold fueled by talk of eurozone doomsday scenarios that prevailed between the summer of 2010 and the summer 0f 2011, during which time the price of gold shot up by more than half to its cycle high of $1,921 a troy ounce.

More recently, Fed Chairman Ben Bernanke has been laying the groundwork for a post-QE world, saying on May 22 that the U.S. central bank was thinking seriously that it might “taper” quantitative easing sometime this year.

Markets, accustomed to the Fed’s life support in the past five years, have been roiled in the past month by the Fed’s shifting posture, but Bernanke has been undeterred, suggesting again last week that the beginning of the end of QE could well take shape this year.

That means that whatever inflationary pressure was in play with QE—which, again hasn’t been much so far—is now likely to be even lower should QE be drawn to a close.

More profoundly, an economy on the mend for five years may at long last be reaching “escape velocity,” meaning recoveries in housing and the jobs market have reached critical mass and the huge downturn and its aftermath—including a huge bull market in gold—may be over.

“I think there are a lot reasons to say the economy is truly recovering,” HAI’s Roy said, stressing that while it’s taken a long time for the U.S. jobless rate to drop to 7.6 percent from more than 10 percent at its peak, Bernanke drove home the point about a brighter future for the world’s largest economy with his optimistic comments last week.


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