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March 13, 2010 Lack of Interest in Gold ETF could lead to a strong correction
Gold ETF’s play a huge role
in the price of Gold bullion and muted demand could result
in trigger happy traders deciding to close out their
positions. If prices should start to fall it could trigger
even more to sell their positions in these ETF’s
potentially triggering a domino effect. These redemptions
would in turn force these ETF’s to sell some of their Gold
holdings, which could have a significant impact on the
price of bullion. The story below highlights some of these
risks.
The WGC argued that
demand showed signs of recovery towards the end of 2009,
as jewellery and industrial demand picked up, offsetting
to some extent the pullback in investment demand.
ETF demand was 85%
higher for 2009 compared to the previous year at nearly
600 tonnes, driven largely by a strong performance in the
first quarter. This demand dropped off sharply by the
fourth quarter of the year, coming in two thirds lower
compared to the same time a year earlier.
Jewellery demand in 2009
was 20% lower year-on-year, but the trend was steadily
upwards, with three quarters of consecutive growth.
Jewellery demand reached 500 tonnes by the fourth quarter
compared to 336 tonnes in the first as the Indian market
showed signs of recovery.
Central banks who are
members of the gold agreement had sold just 1.6 tonnes so
far out of a possible 400 tonnes, according to figures
released in February. The gold agreement runs from
September 2009 to end-August 2010.
There have been
purchases of gold by central banks outside the agreement,
with India, Sri Lanka and Mauritius buying gold from 212
tonne first phase of the International Monetary Fund gold
sale programme. There is another 191 tonnes of IMF gold up
for sale.
In January, there was a
net disinvestment of 22 tonnes of gold from ETFs and some
expect the February figure to be fairly similar to that.
By way of example, the
South African gold ETF, NewGold, has been reporting
divestments and the fund now stands at 1.598 million
ounces of gold from 1.7 million oz in November last year.
Davis believes if the
gold price remains above $1,000/oz investment demand will
remain muted but if the price drops below that level
annual demand for the product could fall to between 300
and 350 tonnes. In the three years before 2009, an annual
average 280 tonnes of gold was absorbed by ETFs.
Full Story
The short to intermediate
time frames suggest that Gold could still mount a strong
correction, especially if this new pattern persists, where
gold trades lower even when the dollar is pulling
back. Also a drop in demand for the Gold ETF could have an
impact on the price of Gold bullion.
Investors should view
strong pull backs in the Gold market as an opportunity to
add to or open new positions, for the long term outlook is
still very bullish.
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