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Hedge Funds Driving Gold ETF Outflows


Hedge fund managers such as John Paulson have been cutting their stakes in gold ETFs while many long-term investors appear to be standing pat despite the precious metal’s price decline.

The amount of gold held in bullion-backed ETFs listed around the globe fell by more than 400 metric tons in the second quarter, according to a World Gold Council report released Thursday.

This reduction was “driven by hedge funds and other speculative investors continuing to exit their positions,” it added. “This was predominantly in the U.S.”

World Gold Trust Services LLC, a wholly owned subsidiary of the World Gold Council, is the sponsor of SPDR Gold Shares (GLD), the largest bullion-backed ETF. [Paulson Slashes GLD Stake]

In the second quarter, overall gold demand fell by 12% from the previous quarter to 856.3 metric tons.

“A wave of outflows from ETFs was the principal cause of the decline, although this was mitigated by record demand for gold bars and coins. Continuing the theme of the previous quarter, demand for jewellery grew significantly to reach multi-year highs,” according to the WGC report.

The outflows from gold ETFs were spurred by Western investors reacting to a seemingly more positive outlook for the U.S. economy and an eventual tapering of quantitative easing, the report said. [Sinking Treasury ETFs Point to September Fed Taper]

“ETF outflows accelerated during the second quarter as a number of hedge funds and speculative investors exited their positions in reaction to predictions of U.S. economic recovery,” the WGC noted. “The prospect of the U.S. government tapering quantitative easing by the end of 2013 had a disproportionate downward impact on the gold price as some investors in ETFs saw their key rationale for seeking a safe haven in gold fade.”

While ETFs may continue to contract, “we expect the pace to slow as the holder base becomes stickier,” according to the report. [No Capitulation Selling in Gold ETF During Crash]

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.