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Diminished Interest In Gold ETFs Indicates Gold Will Still Struggle

By Neils Christensen of Kitco News
Wednesday April 17, 2013 4:26 PM
(Kitco News) - Gold appears to be attracting some buyers after starting the week with massive losses; however, some analysts said it could be difficult for the gold prices to regain their momentum as interest wanes in exchange-traded funds.

Aside from the physical and futures markets, an important gage analysts use to judge the general interest in gold is SPDR Gold Trust (NYSE Arca: GLD), the world’s largest physically backed gold ETF.

Interest in the ETF was on a steady decline before this week's surprising selloff, as disappointed investors search for higher returns, according to analysts.

GLD, as it’s known, is a popular investment among smaller retail investors because it is 1/10 the price of an ounce of gold and is traded like a stock on equity markets – giving investors easier access to the gold market.

Colin Cieszynski, senior market analyst at CMC Markets Canada, said the GLD ETF played a significant role in gold’s performance, but now those investors appear to be shifting their focus away from the gold market.

Cieszynski said equity investors have slowly exited the gold trade because they are looking for better-performing stocks. He said in the last few months equity markets have outperforming gold. Recently the Dow Jones Industrial Average and the Standard & Poor’s 500 stock index rose to record highs.

“Gold prices peaked two years ago. People have been disappointed with GLD’s performance so they have been looking for other opportunities,” he said. “The big drop basically cleaned out the last of the weak hands in the marketplace.”

Cieszynski said that the selloff in gold created a lot of “chart damage” so investors might be hesitant to jump back into gold and GLD.

As of 2:36, Wednesday, GLD traded at $133.13, which was relatively flat from the open. Although well above Monday’s low of 130.50, the ETF has struggled to hold on to its gains in the last two sessions.

Of course the bearish sentiment is not new for GLD. Peter Hug, global trading director for Kitco Metals, said the ETF has been in redemption mode for the last three months.

Other analysts are also bearish on the ETF. In a recent research note Alex Thorndike, senior trader for precious metals and foreign exchange with MKS Capital, said investors are closely watching redemptions of exchange-traded products like GLD.

“Although dwarfed by the previous session outflows continued with 149k oz being redeemed across all ETP's, with total holdings now down at 76.447 Moz, down from 84.378 Moz at the start of the year,” he wrote in his report. “The pullback in gold may entice further short covering in the coming sessions, but I still feel there will be a lot of long term investors looking to sell into rallies - as was evident with the stiff resistance seen at $1,400 yesterday.”

Goldman Sachs analysts, in a Tuesday report, reaffirmed their bearish outlook for GLD. In the broader gold market they said they expect rallies to be capped at $1,400 an ounce.

Because GLD tracks gold prices, the ETF also dropped 13% as a result of the massive selloff Friday and Monday. According to historical data on the SPDR Gold Shares website, more than 36 metric tons of gold were redeemed during the two-day selloff.

As of Tuesday the ETF had holdings of 1,146 tons, which is a 17% decline from its peak holdings of 1,351 tons in December.
By Neils Christensen of Kitco News

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