Gold in exchange-traded funds and products plunged $20 billion and is heading for the biggest monthly drop ever after central bank easing and slumping global economic growth failed to avert a bear market in the metal.
Holdings in ETPs backed by bullion fell 141.81 metric tons in April, heading for the biggest monthly drop on record, data compiled by Bloomberg show. The value of the holdings decline was $20 billion, the most since May 2004. Gold investment outflows reached $9.2 billion in the first quarter as assets in all ETPs rose $70 billion and benchmark indexes in the U.S. climbed to records, BlackRock Inc. said in a report on April 4.
Reduced faith in gold means ETP outflows are likely to continue, according to Societe Generale SA. Gold plunged into a bear market this month even as central banks from the U.S. to Japan are bolstering stimulus measures to revive stalling economies. Data from the U.S. to China signaled slower economic growth, euro-area services and manufacturing shrank for a 15th month in April, and the International Monetary Fund cut its global growth forecast. Jewelry demand in India and China, the top buyers, is surging after prices fell.
“Physical gold demand and actions of central banks don’t have the power at the moment to give gold a boost,” said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt. “As long as heavy outflows from ETFs continue it will weigh on the gold price.”
Gold for immediate delivery rose 1.2 percent to $1,429.27 an ounce by 3:23 p.m. in London. Prices are down 15 percent this year.
Global ETP holdings have dropped 12 percent this year as assets held in the SPDR Gold Trust, the largest bullion ETP, tumbled 19 percent. SPDR gold assets fell to to a 3 1/2-year low of 1,097.2 tons yesterday, down 10 percent this month.
Gold has slumped after 12 years of gains, and fell to a two-year low of $1,321.95 on April 16. Societe Generale SA forecast a bear market in gold in an April 2 report, citing a stronger U.S. economy and higher interest rates, and Goldman Sachs Group Inc. recommended selling gold on April 10. The bank closed its short gold trade yesterday.
“There is a high probability we will see gradual selling from the ETFs,” said Jesper Dannesboe, senior commodity strategist at Societe Generale in London. “The prices dropped so much that people have to take into consideration a real possibility that we are in the bear market. People are just waiting for it to recover a bit to minimize their losses, or maximize their profit, if they are still sitting on a profit.”
While some investors have sold gold to buy stocks, others may have just changed the method of their allocations, according to Marcus Grubb, managing director of investment research at the World Gold Council in London. The $20 billion drop in the value of gold exchange-traded products and funds this month may signal some investors are moving metal to new accounts after banks adjusted their fees.
“There is evidence of some switching from safer assets into risky assets,” Grubb said in a telephone interview yesterday. “Some investors are still negative, they still see a lot of risk out there. They may have switched from the ETFs to the allocated bullion accounts.”
UBS AG, Switzerland’s biggest bank, said yesterday that investors are more interested in converting ETP holdings into allocated accounts. The bank in January said it revised fees for unallocated accounts and was offering an alternative physical account that had a “lower fee structure.” Credit Suisse Group AG, Switzerland’s second-biggest bank, also adjusted precious metals charges.
The Financial Times reported at the time that the banks were trying to encourage holding metal through allocated accounts, where they act as custodian and don’t need to increase capital reserves. That’s instead of holding metal through unallocated accounts, which show up on balance sheets.
ETP demand remains “very sticky” even after more than 300 tons of outflows from the record in December, Grubb said. Goldman said yesterday that ETP holdings will probably drop even more, while Morgan Stanley said investor interest in gold-backed ETPs is declining.
“When you look at the way ETFs have behaved in this volatility, they’ve done what they are supposed to do,” Grubb said. “They faithfully tracked the gold price in a very efficient, low-cost way, which is what ETFs were designed to do.”