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Why Gold ETF Holdings are a Leading Indicator


Gold prices dropped back below $1,700 an ounce on Thursday on disappointment the Federal Reserve didn’t announce more aggressive monetary easing. However, ETF investors haven’t been selling amid the recent price weakness, which historically has been a good sign for the precious metal.

On Wednesday, the Fed said it will buy $45 billion a month worth of Treasuries and continue purchasing $40 billion of mortgage securities. The central bank also announced it plans to keep interest rates near zero until the unemployment rates falls below 6.5%, as long as inflation remains low.

“This announcement is a bit confusing to gold investors as it linked policy to unemployment, etc.,” said a Tokyo-based trader in a Reuters report. “Perhaps the market wanted unlimited QE.”

“We view the [Fed] announcement as bullish, but with market expectations already factored in for some easing, we don’t expect prices to react robustly near-term,” added James Steel, an analyst at HSBC Securities, in a MarketWatch story. “In the long run, the ongoing monetary expansion is supportive of gold, especially if it is a factor weighing on the U.S. dollar.”

Jeffrey Nichols, senior economic advisor to Rosland Capital, in a recent note said gold continues to disappoint, mired in a trading range between $1,700 and $1,750 an ounce. [Gold ETFs Gain Inflows Despite Price Weakness]

“Recent efforts to move higher have been thwarted by stepped-up speculative selling and softer physical demand with many buyers now conditioned to wait for the next dip. At the bottom of this range, bargain hunting in the form of stepped up physical demand from central banks, sovereign wealth funds, and some of the gold-friendly hedge funds has created a floor under the market,” he wrote.

Looking ahead, gold prices should be extremely sensitive to the outlook on the U.S. fiscal cliff. [How Gold ETFs Would React if the U.S. Falls Over the Fiscal Cliff]

Despite the recent trend lower in gold prices, ETF investors haven’t budged. The amount of bullion in gold-backed exchange traded products is at record highs.

“Changes in the aggregate gold holdings of ETFs have been a fairly consistent leading indicator of future gold prices over the past few years. Globally, gold ETFs purchased nearly 250 tons (about 800 million ounces) so far this year – and the total quantity of ETF gold held on behalf of investors now amounts to more than 2,600 tons,” Nichols writes.

“It may well be that money flowing into gold ETFs is a consequence of the very accommodative monetary policies now being pursued by the Federal Reserve and many other major central banks across Europe and Asia – with rapid central-bank money growth a causative factor explaining both strong demand for ETF gold and the long-term upward trend in the metal’s price,” he adds.

Since gold ETF assets tend to be “sticky,” their buying patterns are seen as a better gauge of long-term sentiment rather than short-term price fluctuations. [Measuring the Impact of Gold ETFs]

The largest gold ETFs include iShares Gold Trust (IAU), SPDR Gold Shares (GLD) and ETFS Physical Swiss Gold Shares (SGOL). [How to Use Gold ETFs]

ETFS Physical Swiss Gold Shares


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.