Trading precious metals against each other based on purchases and sales through exchange-traded products would have returned an annual profit of about 30 percent since 2007, according to JPMorgan Chase & Co.
The bank rates investment in the products on a weekly basis, buying the metal with the highest current holding relative to the past six months and selling the one with the lowest relative holding. The strategy, which was first calculated this month, would have been successful about 56 percent of the time since 2007, according to JPMorgan.
Gold entered a bear market in April and sales from ETPs since the start of January surpassed what was amassed in the combined previous two years as some investors lost faith in a store of value amid an improving U.S. economy and rally in equities. While the four precious metals would have on average been bought and sold equally as much each other since 2007, JPMorgan’s strategy suggested selling gold since January and buying platinum since the end of March.
“It’s a decent success rate,” Matthew Lehmann, a global strategist at JPMorgan’s asset allocation team in London, said in a phone interview last week. “Even that tiny margin over time gives you a huge advantage cumulatively against the market. What makes this strategy interesting is that the flows appear to work better on a relative basis. Having four metals so that you’re not always exposed to one helps as well.”
Investors are now selling gold after holdings rose every year since the first product was listed in 2003, data compiled by Bloomberg show. Bullion for immediate delivery slipped 18 percent this year to $1,378.75 an ounce in London, valuing the amount held through the products at $95.7 billion. About 50 percent of metal in the SPDR Gold Trust, the biggest gold ETP, is owned by institutional investors, with the rest held by retail investors, Deutsche Bank AG said in a May 14 report.
Gold ETP holdings slipped 473.5 metric tons this year, equal to about two months of mine production. At least another 435 tons may be sold if the Federal Reserve curbs stimulus before the end of the year, Credit Suisse Group AG said in a May 22 report.
The 18 percent drop in gold holdings this year compares with gains of 0.2 percent for silver, 16 percent for palladium and 34 percent for platinum. Silver prices plunged 27 percent to $22.2571 an ounce this year, the worst performance in the Standard & Poor’s GSCI gauge of 24 commodities. Platinum is down 5.9 percent at $1,448.48 an ounce and palladium rose 3.9 percent to $731.43 an ounce. Platinum and palladium are mostly used in car autocatalysts.
“We’ve looked at ETP flows and what’s happening in gold and found that they’re not always that correlated,” Lehmann said. “That’s most noticeably been the case over the last two or three years, where there’s been periods where gold sold off but the ETP holdings kept rising.”
While the International Monetary Fund lowered its 2013 global growth outlook four times since July, it expects expansion to accelerate to 4 percent in 2014 from 3.3 percent this year. Industrial applications account for about 10 percent of gold consumption, compared with 60 percent for platinum and 91 percent for palladium, data from the World Gold Council and Johnson Matthey Plc, both based in London, show.