Gold ETF Selling Would Dump More Bullion on Market After Crash

April 17th at 2:20pm by John Spence

Investors have pulled over $10 billion from SPDR Gold Shares (NYSEArca: GLD) and more selling in bullion-backed ETFs could put additional pressure on the precious metal’s price, Wall Street analysts say.

GLD is down about 18% year to date with the recent sell-off pushing gold prices below $1,400 an ounce for the first time since 2011. [Gold ETF Outlook: The Thrill is Gone]

The $51.3 billion gold fund saw record trading volume during Monday’s 9% plunge. [No Capitulation Selling in Gold ETF During Crash]

Other bullion-backed ETFs include iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL).

Goldman Sachs recently advised clients to short gold, and part of the thesis was that gold ETFs were seeing outflows and would no longer help support the metal’s price.

On Wednesday, Goldman commodity strategist Jeffrey Currie in a note said he believes there is “the potential for a further sell-off in ETF holdings given that a significant portion of the holdings, 8 million ounces or 11% of the existing holdings, were purchased at levels at or above current gold prices,” reports Matthew Boesler at Business Insider.

“However one measures the aggregate ETF holdings, they are still extremely significant,” the Goldman analyst wrote.

GLD, the largest gold ETF, ended 2012 with total assets of $72.3 billion. Redemptions and gold’s price pullback have led to a 29% decrease in assets so far this year.

“Investors whose purchases more than doubled the fund’s capitalization since 2008 were just as eager to sell amid signs of weakening economic growth in China and liquidation by central banks,” Bloomberg reports. “The SPDR Gold Trust, which balances supply and demand by creating and redeeming shares, has pulled more stock from the market this year than ever before.”

“It’s affecting the gold market because that ETF no longer needs that gold to support that share count and it’s being unloaded into the marketplace,” said Michael Cuggino at Permanent Portfolio Family of Funds, in the story.

“The tradability of the ETF relative to trading gold in the spot market does make these price shocks more pronounced,” added Paul Baiocchi, a senior ETF specialist at IndexUniverse. “It’s a fair point to say that the ETFs have had some impact on gold prices. What that is and to what extent remains in question.”

Agnes T. Crane at Reuters Breakingviews said ETFs have contributed to gold’s gyrations this week.

“Though it is still not clear what sparked the slide on Friday and Monday, stock-like ETFs added to the selling pressure. It’s a reminder there’s a dark side to making illiquid assets easier to trade,” Crane wrote. “Though ETFs represent only a sliver of the overall gold market, their liquidity and transparency make them an obvious benchmark for sentiment. Moreover, the ability to add and shed holdings quickly – unlike, say, storing bullion in undisclosed locations – can exacerbate price swings.”

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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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