Gold investment demand divergence between the Paper Gold versus the Physical Gold has been widening the start of this year, an occurrence not seen ever before.
World’s biggest bullion-backed exchange-traded product, SPDR Gold Trust said assets in the company dropped to 1,020.07 metric tons Thursday, the lowest since February 2009. The total global gold demand for the first quarter of 2013 declined both in terms of tonnage (-13%) and in dollars (-16%). The volume decline was driven primarily by 177 tons of outflows from ETFs (Paper Gold), versus inflows of 53 tons last year. If we remove this component from the mix, total global demand actually increased by 8% during the first quarter. It is somewhat odd to see that Gold investment demand in the form of Gold bars and coins climbed by a healthy 10.3%, while the Paper Gold – ETF investment demand turned negative and total holdings dropped by over 7%. Some of this divergence can be explained by investors exiting paper gold investment positions in gold in favor of physical Gold investment & taking possession of the physical metal. The total physical Gold investment demand rocketed 52% higher in India and 22% higher in China.
Gold has always been a popular investment, especially in India, irrespective of the options. People treated Gold investment like the cure for everything. If you were worried about a depression, buy gold. If you were worried about inflation, rush into a quick Gold investment, so on & so forth. Gold investment demand in the west has picked up pace only post 2008, when stock markets collapsed & Gold prices shot up above $850 from $400 in a matter of months. Fear of economic collapse started the gold rally, and greed accelerated it. By 2009, speculators and others looked to ride the popularity of Gold investment.
Hedge funds and other big investors piled in & then was the birth of Paper Gold. Instead of buying gold bricks and stashing them in their basement, many hedge funds and big investors turned to buying gold exchange-traded funds, which trade on markets like stocks. The most popular offering, the SPDR Gold Trust, attracted big investors like John Paulsen, who made billions betting on the mortgage meltdown, and George Soros. Anxiety and gold prices kept climbing in tandem. Right after Standard & Poor’s stripped the U.S. of its top credit rating in August 2011, the price peaked above $1,900. As money poured in, the SPDR Gold Trust grew into the second-largest exchange-traded fund behind the SPDR S&P 500, which follows the stock market. And its supply of gold swelled from 780 metric tons at the start of 2009 to 1,353 metric tons in December. In June 2012, Billionaire investors George Soros and John Paulson increased their stakes in SPDR Gold Trust – the biggest exchange- traded fund backed by gold as prices posted the largest quarterly drop since 2008. Soros Fund Management had more than doubled its investment in the SPDR Gold Trust to 884,400 shares as of June 30 – 2012, compared with three months earlier, a US Securities and Exchange Commission filing for second-quarter holdings showed while Paulson & Co increased its holdings by 26% to 21.8 million shares. Besides the Gold ETF, Paulson’s firm also held onto significant stakes in the shares of major gold mining companies, including Barrick Gold Corp, AngloGold Ashanti Ltd and about half a dozen others. He also had a stake in Freeport-McMoran Copper & Gold Inc.
Divergence concerns have been somewhat validated in recent years by lawsuits against banks for charging storage fees on Silver they didn’t actually store, large investors being forced to settle in cash, multi-year delays from countries seeking to repatriate their gold holdings, a strong case for paper manipulation of the prices by the largest banks and theft of customer funds at the largest commodity brokerages. Above all, the evidence of manipulation in paper Gold and Silver markets has caused a significant divergence between the physical and paper prices, suggesting that the COMEX price is not reflective of true free market pricing. Based on all these issues, it makes sense to look at gold investment demand with and without the paper-driven ETF component. And while it is somewhat concerning to see total demand with ETF outflows declining, that decline of 13% is rather small given the tonnage outflows from ETFs. And it is important to keep these outflows in perspective. While it is an abrupt turnaround from the inflows in previous quarters, total ETF holdings only dropped by 7% and are still above 2011 levels. Likewise, the 10% increase in demand for bars and coins suggests that the market for physical gold and silver remains strong. The massive physical Gold rush witnessed in April, ranging from Japan to India, China, Australia & the US is well known & need not be mentioned again in this article.
It is also interesting to note that sales of gold by signatories of the Central Bank Gold Agreement (CBGA) were non-existent in the first quarter of 2013. Cumulative sales are running at just under 200 tons, which is just a fraction of the 1,600 tons that would be permissible to date under the agreement. In other words, central banks around the globe continue to be significantly more interested in accumulating gold reserves than disposing of them. Gold producers have significantly reduced the size of the global hedge book in the past few years and there appears to be no appetite to start new hedges, despite the sharp drop in gold prices. This signifies that the experts and executives at top mining companies continue to be very bullish about the future price of gold.
Gold investment, often touted as the most trustworthy of all investments, has looked wild over the past month. After starting April above $1,600 an ounce, it dropped to below $1,325 on April 15 – 16. Gold investment demand of the paper kind started getting hit by way of outflows since Dec 2012. George Soros, who called gold “the ultimate bubble” in 2011, reduced his position in SPDR Gold by more than a half to 600,000 shares in the fourth quarter of 2012 from 1.32 million in the third quarter. Later on in 2013, notable institutional investors, including George Soros, Julian Robertson and Allianz’s PIMCO reduced their bets on gold during the first quarter, when bullion posted its biggest quarterly loss in more than four years. Paulson & Co owned 21.8 million shares in the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, at the end of December, unchanged from Sept. 30 – 2012. The value of Paulson’s SPDR ETF holdings, however, dropped to $3.54 billion in the fourth quarter from $3.75 billion in the third, resulting in a paper loss of $215.5 million for his fund. The decline was because of a 5 percent, or $100, drop in the price of spot gold during the fourth quarter.
As money poured in, the SPDR Gold Trust grew into the second-largest exchange-traded fund behind the SPDR S&P 500, which follows the stock market. And its supply of gold swelled from 780 metric tons at the start of 2009 to 1,353 metric tons in December. But now it looks like the fast-money has soured on the yellow metal. George Soros slashed his stake in the SPDR Gold Trust fund by 55% at the end of last year, according to the most recent regulatory filing. Judging by the numbers, it looks like others decided to jump out of the market at the same time. Hedge funds and big investors pulled $8.7 billion out of gold funds last month, according to EPFR Global, a firm that tracks where big investors put their money. EPFR says it was the biggest monthly withdrawal out of gold funds since the firm started collecting data in 2000. The SPDR Gold Trust unloaded 12% of its gold in April, selling 146 metric tons.
There’s no single investment destination for all the money rushing out of Paper Gold:
Some of the money flowing out from Paper Gold investment appears to be trickling back into the U.S. stock market. Though the most places for investors now are real estate funds, junk bonds, emerging-market bonds and stocks in big companies that pay dividends, the most preferred choice for most investors is physical Gold investment. Central Banks are going to print and print until money is worthless, which will surely translate into hyperinflation – while it’s ironical that many major Central banks are looking forward to inflation rises. Also according to the latest WGC report, the Gold investment demand remains strong globally, including a noted shift to physical bullion by investors and continued buying at elevated levels from central banks. Moreover, the paper Gold or Silver investors are speculators & these people are fickle minded, moving their money around to the hottest sectors in an attempt to follow the latest trends. They will likely pile back into gold investment as the price begins moving higher. In the meantime, most of the strong-hands that are long-term gold investors continue to hold their positions and buy the dips.
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