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May Gold ETF Outflows Reversing In June

Olivier Ludwig

A dismal jobs report from the U.S. Department of Labor has changed gold’s fortunes in financial markets—both in terms of asset flows and price—ending a period of the yellow metal’s relegation to second-class status as a safe haven behind dollar assets such as Treasurys.

The May jobs report showing 69,000 new jobs were created last month was well below expectations of 175,000 in a Bloomberg News analyst survey—getting everyone talking that the economy might need more help from policymakers, lest the eurozone’s debt problems completely derail global growth. An uptick in the unemployment rate to 8.2 percent from 8.1 percent added to pessimism.

The SPDR Gold Shares (GLD - News), the world’s biggest physical bullion ETF, has been hauling in assets again—$187.1 million since the start of June, according to IndexUniverse’s Fund Flows Tool.

That’s a stark reversal from the $397.1 million in GLD redemptions last month, when bond funds carried the day amid angst about Europe. On May 22 alone, GLD lost $891 million —a huge move that got some analysts thinking that the decade-long gold rally might actually be running its course. Not so quick.

The changing flows picture for GLD have echoed its price movement, with month-to-date gains on GLD at more than 3 percent, after the ETF’s price tumbled 6.34 percent last month, according to data compiled by IndexUniverse.

As a comparison, the iShares Barclays 7-10 Year Treasury Bond Fund (IEF - News) rose more than 3 percent last month, and the fund is down almost 0.5 percent in the past five trading sessions.

Last week, yields on 10-year debt reached record lows below 1.5 percent.

QE3 Now On The Table?

The biggest reason for gold’s shifting fortunes is that any move by the Federal Reserve to pump more money into the financial system to keep it afloat is likely to cheapen the dollar and make commodities in general—and not just gold—more expensive.

That’s because gold and oil and a host of other commodities are priced in dollars.

If the Fed implements a third round of “quantitative easing” or QE—bond buying aimed at pinning yields down to encourage job-creating borrowing—it’s almost a given that U.S. crude oil prices will again top $100 a barrel. For now, they remain well below $90, providing relief for U.S. motorists.

As for gold’s price, it’s hard to say.

But some end-of-the-world-as-we-know-it voices in the markets—notably Marc Faber’s or Peter Schiff’s —say gold will at some point reach new records above the high around $1,900/troy ounce set last summer after the Fed ramps QE again, which to Faber and Schiff is a given.

And IAU Too

GLD isn’t the only gold ETF benefiting from the potential of QE3.

The iShares Gold Trust (IAU - News) has seen inflows this month through June 5 of $57.9 million, after suffering outflows of $198.7 million in May, according to data compiled by IndexUniverse.

IAU, at $9.15 billion, is much smaller than GLD, which ended yesterday’s trading session with $67.75 billion in assets.

That said, IAU is the cheaper of the two bullion funds, with a 0.25 percent annual expense ratio compared to GLD’s 0.40 percent.

But for short-term holders, that price advantage may make less of a difference, since IAU’s per-share price is so much lower than GLD’s.

In other words, investors buying or selling a fixed amount of either gold ETF would end up paying more in per-share bid/ask spreads by choosing IAU, since IAU costs $15.78 per share and GLD has a share price of $157.21.


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