With Gold ETPs Down 31 Percent YTD, Has Gold Lost its Luster?

by on December 16, 2013 5:55 pm BST

Gold seemed to be the gift that kept on giving. It rose every year in the last 13, and exchange-traded products (ETPs) reached a record $148 billion in 2012. However, this year was different. Institutions dumped ETP holdings at the largest rate in the securities’ inception. Gold-backed ETPs (bullion and/or derivatives) are down 31 percent year-to-date, which exceeds the slump in bullion by roughly five percent. Nearly $69.7 billion in value was withdrawn from these products during the worst gold slump since 1981. Data complied by Bloomberg showed that analysts believe an additional 311 tons with be withdrawn next year. As bullion moves towards the first declining year since 1999-2000 and ETPs first declining year in their decade existence, is gold beginning to loose its luster?

“All the bullish factors we had pushing gold higher in the last 12 years are now going into reverse,” said Robin Bhar, an analyst at Societe Generale. Bhar believes there is more precious metals ETP selling in 2014. The driving factors remain bearish for gold. Inflation across major economies is slow, if not declining. Furthermore, institutions show who is really in control of the spot gold market, and it has scared away the assertion that gold is a safe-haven. In 1999 and 2007, investors thought equities were safe havens. Additionally, the Federal Reserve will taper at some point whether it is December, January, February, March or April. As long as the $85 billion per month stimulus is not upped to $95 or $100 billion, the looming threat of a taper will keep gold from getting out of touch with reality.

However, there is physical demand for bullion. China and India have added thousands of metric tons to their reserves, and Turkey has recently seen a increasing in bullion demand. The U.S. Mint also recorded record sales for both the gold and silver American Eagle coins, but there is a divergence in price and demand. And it is due to these ETPs. Capital outflows slowed to an average of 40.7 tons per month opposed to the 97.7 tons per month seen in the first half of the year, but holding in gold ETPs are still declining.

Precious metal ETPs are traded like equities. They can be bought and sold on the flip of a coin, and they offer access to bullion without actually holding it. As increasing positive data out of the US, China and Germany put smiles on economists, institutions and the alike, they are selling these ETPs with fury. This April, when the massive selloff began, an estimated $400 billion in paper gold (ETPs) were sold and sparked the snowball bear market. Capital outflows slowed to an average of 40.7 tons per month opposed to the 97.7 tons per month seen in the first half of the year, but holding in gold ETPs are still declining.

Chief metals economist Peter Richardson, at Morgan Stanley, said “inflationary pressures are not strong.” And encouraging economic data is a reason not to buy gold.

On the other side of the debate, Nick Moore of BlackRock believes the lower prices in metals could attract buyers and, in return, boost ETPs in 2014. Doomsayers like Harry Dent, Marc Faber and Peter Schiff say now is the time to buy gold, but it is not for investment purposes per say. The hardened gold bugs believe the dollar and US economy will collapse for a myriad of reasons. And this could be very true. They insist buying gold for insurance purposes. You don’t buy health insurance when you get sick because it will cost more, so it is best to pay the smaller premiums until the time comes.

What I try to separate is why gold prices are declining oppose to why some one could own it. Trading ETPs for the mere purpose of trading is a tough, volatile and, in most cases, a losing preposition while current conditions do not warrant higher gold prices. However, precious metals serves its purpose in a diverse portfolio. The doomsayers will say I told you so when the catalyst lifts gold to peeks, but that is done through physical bullion and less likely buy holding ETPs until the day gold bugs dream about. Until then, gold is still in a bearish market, and it just means discounts for those that choose to hold bullion.

1D Chart of AMEX Gold Bug Index (2Y)

1D Chart of AMEX Gold Bug Index (2Y)