Gold holdings in exchange traded products listed around the globe hit record high of 77 million ounces as ETF investors anticipate another round of quantitative easing from the Federal Reserve.
Although futures market optimism remains weak — net long speculative positions are hovering near the lowest levels in 3 years — ETP investors appear to be preparing for gold price performance later this year.
According to Bloomberg data, global ETP gold holdings reached a record high 77mn oz last week, as investors appear to be taking advantage of lower prices to position themselves for another round of Federal Reserve stimulus.
Looser monetary policy is likely to be dominant driver of gold price in 2012.
The US Dollar hit a 2-year high last week versus the Euro, as the deteriorating outlook, particularly for the Eurozone, prompted continued investor deleveraging. US dollar strength has hampered the performance of gold since September 2011, making it less reactive to systemic risk. [Euro ETF Tests One-Year Low After Rate Cut]
While politicians have been slow to act, central banks have played a crucial role providing support for the ailing global economy.
This dynamic was highlighted illustrated last week with the ECB cutting interest rates and the BOE increasing its asset purchase scheme in an effort to offset continued policy paralysis at the European government level.
Gold ETF investors are positioning for another round of Quantitative Easing (QE) from the Fed. Disappointing manufacturing and jobs data in the US last week showed that US economic activity is losing momentum, boosting the likelihood that the US Federal Reserve will introduce with a further round of QE.
While the relationship between gold and the US dollar is not straightforward, following previous episodes of quantitative easing, the gold price has strengthened (and the US Dollar has weakened) when the Federal Reserve has injected liquidity into the financial system.
Gold is likely to be the primary beneficiary of rising expectations of additional liquidity support, as investors have historically looked to gold to help offset the negative effect of rising money supply on a country’s currency.
Additionally, with evidence indicating that interest rates will remain at record lows for an extended period, the opportunity cost of holding bullion compared to interest-bearing assets becomes substantially less, increasing gold’s appeal.
Gold ETFs could see action on some key events this week.
Comments from the ECOFIN meeting of Eurozone finance ministers will be closely followed for signs that the commitment to assist severely indebted Eurozone countries and their banking systems is not softening.
Investor focus will shift to the release of the FOMC meeting minutes to gauge how quickly the Fed might act in introducing another round of quantitative easing.
Following last week’s surprise rate cut by the People’s Bank of China, key data from China, including GDP growth, industrial production and retail sales data will also be closely monitored for clues to the seriousness of the slowdown in the world’s key growth engine.
ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)