Gold ETFs haemorrhage assets as gold price dips below $1200

Jun 28th, 2013 | By | Category: Commodities

Gold has shed almost $600, or approximately one-third of its value, over the past nine months, including nearly 14% during June alone, after the US Federal Reserve said it could wind down its quantitative easing stimulus programme.

Gold ETFs haemorrhage assets as gold price dips below $1200

Gold ETFs have endured sharp outflows.

The price falls have been accompanied – and indeed precipitated – by heavy selling from gold-related exchange-traded funds (ETFs) and physical gold exchange-traded commodities (ETCs).

While there have been some inflows from traders sniffing a bargain, they have been dwarfed by outflows.

As Axel Merk, chief investment officer at Merk Funds, an asset management firm which is itself preparing to launch a gold ETF, said: “You don’t want to catch a falling knife, so people who might be buyers are stepping aside and don’t want to show gold at their quarter-end statement.”

Market-wide data shows that most gold ETCs have seen outflows in 2013. According to the latest Deutsche Bank report, Gold Bullion Securities (GBSS) and Source Physical Gold P-ETC (SGLD), two popular European gold products, each lost over £50 million last week (17 to 21 June).

These trends have been reflected in trading through execution-only stockbrokers.

Barclays Stockbokers recently revealed that gold ETCs had all but disappeared from its list of most-traded products in May. Similarly, Hargreaves Lansdown has seen an increase in the number of sellers of gold ETCs, with not one gold ETC recording a net inflow on the firm’s Vantage platform in June.

Adam Laird, Passive Investment Manager at Hargreaves Lansdown, said: “The volatility in the gold price has spooked investors. In previous drops, demand for the metal has been balanced with some investors taking an opportunity to top up holdings. We do not see this happening at the moment.”

He added: “Many investors have bought gold for its long-term properties – traditionally it has been a store of value and a hedge against inflation. Gold can still be useful for diversification, but, as we have seen, it is not a low-risk asset. The price could well fall lower.”

Analysis from Barclays Capital has revealed that investors are still holding around 288 tonnes in physical gold ETF positions that were acquired at a price above $1,300. With gold now trading around the $1200 mark, these holdings are well in the red. This suggests that momentum in gold ETF outflows could accelerate should investors take action to close-out these loss-making positions.

While long-only investors are deserting the yellow metal, some shorter-term traders are deploying innovative short gold ETPs to profit from price declines. These products, which move inversely to the price of gold and thus make money when the price falls, have enjoyed healthy inflows.

Options in this space include the single short ETFS Daily Short Gold (SBUL) from ETF Securities and the triple short Boost Gold 3x Short Daily ETP (3GOS) from Boost.

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