Gold ETFs helped fuel the precious metal’s historic rally as the exchange-listed funds allowed investors to buy gold in one trade without the hassles of transporting or storing bullion.
Although gold prices have weakened to under $1,600 an ounce, investors in bullion-backed ETFs haven’t rushed for the exits. They’ve generally stayed the course so far, which suggests investors in gold ETFs have a long-term bullish view on the precious metal. [Gold ETFs Decline in Risk-Off Trade]
However, the largest bullion ETF SPDR Gold Shares (NYSEArca: GLD) reportedly saw outflows of nearly $900 million on Tuesday. [Are ETF Flows Sending a Warning Signal on Gold?]
Commerzbank strategists in a Barron’s report said it was the biggest single-day outflow since August 2011 and the selling must be regarded as a “negative sign” for gold.
“ETF investors have shown themselves to be unbothered to date by the reduction in the price of gold given that nothing much has changed in terms of how the yellow metal’s long-term prospects are judged,” Commerzbank said in a note, according to the Barron’s story. “If even ETF investors are now being caught up in the selling pull, this could point to a change in the long-term view of these investors.”
Gold holdings in bullion-backed funds listed around the globe are hovering near record highs of about 2,400 metric tons, according to Bloomberg.
Some analysts speculate that heavy outflows in gold ETFs could exacerbate a sell-off in precious metals. [Could Gold ETFs Worsen a Price Decline?]
“Analysts generally say it’s difficult to quantify the effect of funds that hold bullion on the price of gold, but agree that the growth of their holdings has helped fuel the surge in the metal’s price in recent years,” The Wall Street Journal reported earlier this year. “And that suggests that a drop in those holdings could contribute to a decline in the price of gold, which already is well below its recent peak.”
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. [Measuring the Impact of Gold ETFs]
The World Gold Council reported that gold demand from ETFs fell to 154 metric tons last year from 367.7 in 2010. [Gold ETF Demand Fell 58% in 2011]
SPDR Gold Shares
Full disclosure: Tom Lydon’s clients own GLD.