Measuring the Impact of Gold ETFs

January 25th at 11:35am by John Spence

Bullion holdings of gold exchange traded funds are sometimes used to gauge the demand and sentiment for the precious metal. However, the relationship between ETF holdings and the price of gold isn’t clear-cut and may not be a reliable indicator for short-term moves, according to Wall Street analysts.

Global gold ETFs hold about 2,350 metric tons of bullion. More than half of that resides in the largest precious metal ETF, SPDR Gold Shares (NYSEArca: GLD). It holds roughly 1,250 tons of gold, or over 40 million ounces, valued at nearly $67 billion.

ETF bullion holdings “dwarf those of all but the most gold-addicted central banks,” WSJ.com’s The Source blog reports Wednesday.

However, the correlation between gold prices and ETF holdings “is much lower than that between gold and its futures market, which is also a lot more volatile,” according the report, which cited research from analysts at Nomura.

“This suggests that ETF holdings might provide us with a better perspective on how long-term investors view the prospects for gold and, by extension given gold’s last-resort role, their views on everything else,” WSJ.com points out. “Nomura also noted that, when it comes to big shifts in gold ETF holdings, large rises have a strong relationship with rises in the gold price, while the relationship with falls in holdings is much weaker. For gold futures, we find the inverse. Big rises there a have weak relationship with price action, while large falls may well indicate that gold is heading south.”

ETFs have played a role in the metal’s historic rally, but now some are wondering whether the funds could speed a decline in gold prices on the way down. ETFs can be bought and sold during the day. [Could Gold ETFs Worsen a Price Decline?]

Gold funds’ bullion holdings are down slightly from the record level reached in December. [Are ETF Flows Sending a Warning Signal on Gold?]

Gold ETFs may indeed be a better indicator of how long-term investors are viewing the precious metal. For example, ETFs didn’t see big outflows during the sharp sell-offs that hit gold in the back half of 2011.

“Global ETF investor positions have continued to trend up in both gold and silver, reflecting the fact that long term price supports such as negative real interest rates, currency debasement and sovereign/financial sector default risk, and rising emerging market/central bank demand remain embedded in the 2012 outlook,” ETF Securities noted in a recent report. [Gold ETF Investors Say Pullback is ‘Excessive’]

Gold ETFs were down slightly on Wednesday as markets awaited the Federal Reserve announcement on interest rates. [Gold ETFs Battle Technical Resistance; All Eyes on Fed Decision]

ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)

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.

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